Stiglitz calls Geithner plan "robbery of the American people"

My blog has repeatedly touted Nobel Prize-winning economists Paul Krugman and Joe Stiglitz as men Obama should let run the government’s financial crisis response.

Well, Stiglitz shares Krugman’s view that the Geithner plan is a massive taxpayer subsidy to banks that own crappy assets and to wealthy, powerful investors who will “buy” the toxic assets. I put “buy” in quotation marks because they can “buy” them for as little as 3% of the sale price, with government agencies (i.e., taxpayers) lending the other 97%. And we’re not requiring “buyers” to repay their loans unless the assets they “buy” are worth enough to pay back taxpayers. If they overpay for assets, taxpayers will bear up to 97% of the losses!

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, [Stiglitz] said.

“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”

Even if the plan clears banks of massive toxic debt, worries about the economic outlook mean banks could still be unwilling to make fresh loans, while the prospect of a higher tax burden to pay for various government stimulus plans could further undermine U.S. consumers, he said.

Posted by James on Wednesday, March 25, 2009