Gold News

Geithner's Last Week in the Job

A trillion here, a trillion there, and pretty soon you're bankrupting America...

SO HERE WE GO AGAIN, writes Dan Denning in his Daily Reckoning Australia.

Maybe this will be the week that historians look back and say, "That's when it all started to get better...

"Geithner came out with his toxic asset bailout plan. China stimulated. Stock markets bottomed. The crisis ended and the world got better and better forever and ever."

Or maybe not. We'll just have to see. Either way, if Tim Geithner's plan sends the market down five percent or more this week, we reckon it's his last week on the job as US Treasury secretary. Which may come as a relief to poor Mr. Geithner.

By all accounts, it sounds like Geithner will make US$1 trillion (or thereabouts) available to hedge funds and private investors in order to buy toxic assets off America's banks, removing them from the banks' balance sheets and fixing the "toxic asset" problem for good.

"Here,  take this $1 trillion," the plan goes. "Buy those bad assets. Benefit from the upside. We'll take all the taking all the risk on lending to you against those toxic investments.

"What's that? Why yes, of course I'm serious."

If you've been paying attention to the way the US Congress treated AIG executives during hearings last week, you'll wonder why anyone of sound mind would want to become a business partner of the United States government. It's a government that is now willing to change the laws to punish people of whom it disapproves. And before that, it's a Congress that was willing to pass a thousand page stimulus package that no one had read.

Does anyone really believe these idiots have any idea what they're doing? And does anyone believe private capital will hold hands with Uncle Sam and take his borrowed money to buy toxic assets?

On the face of it, using someone else's money to take risk doesn't seem so bad. But given the last few weeks in Washington, private investors would have serious doubts about whether any profits that might result from owning those assets would actually go to investors, or would be confiscated by the Congress.

"Political risk" is the kind of investment risk you used to associate with dictatorial regimes in Africa, not democratic regimes on the Potomac. But there's no doubt investors in America (like China and its $700 billion in bonds) now face real political risk. All of which is to say that the government is making investors more nervous and more risk averse.

This is not the kind of indifference that comes with bottoms. This is the kind of panic that comes with crashes. There's a chance the risk could diminish this week if the Geithner plan is well received and the morons in Congress put down their pitchforks. But if it doesn't change for the better, it could change for the worse.

Even assuming the plan is well received, banks are still going to need more capital before they begin lending again. Former Fed chairman Alan Greenspan told investors at a conference in Acapulco Mexico that "Restoration of normal bank lending will require a very large capital infusion from private or public sources."

Greenspan puts this number somewhere "north" of $750 billion. But a trillion here...a trillion there...and pretty soon you're bankrupting America.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals