Sachs: "Spending that helps make rich guys richer while leaving the poor to die"

Columbia University economist Jeffrey Sachs is outraged that “the taxpayer transfers to make ‘rich guys richer’ could amount to tens, or hundreds, of billions of dollars of the public’s money, massive transfers that are avoidable”:

The government loans by design will go to poorly capitalized special investment funds set up specially to buy toxic assets. The approach is tailor-made to leave the FDIC and Fed with massive losses. Since the taxpayer losses will be hidden on the balance sheets of the FDIC and Fed, the tens or hundreds of billions of dollars of taxpayer losses will not be recognized until the program is long forgotten by the public.

The cheaper and more equitable way would be to make shareholders and bank bondholders take the hit rather than the taxpayer… The government could provide new loans to blue-chip investors to buy up the toxic assets at a deep discount, but the government’s loans would have to be repaid by the investors whether or not the toxic assets pay off. In the current plan, the investors are allowed to default on the government loans if the toxic assets perform badly.

Investors would of course bid less for these assets than under the Geithner-Summers plan, so that the banks and bondholders would get less, but the taxpayer would also be left much less exposed. If the write-downs of the bad assets force the bank into insolvency, the FDIC would pump in public capital to keep the bank operating without interruption. Even in that case, however, the solution would be cheaper than under the current plan, since the taxpayers rather than the existing shareholders would be the claimants on the bank’s assets.

We all know the end of the story as it’s now being written with an overpriced rescue of the banks. When it comes time for health care reform, education funding, infrastructure rebuilding, and (heaven forbid) help for the world’s poor and dying people, there will be no fiscal space. Budgets will be tight. Spending that helps make rich guys richer while leaving the poor to die of hunger and disease seems to be par for the course in our Wall-Street-besotted public policy.

Posted by James on Monday, March 30, 2009