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Is the Geithner Plan DOA?


The Wall Street Journal reports that the Public-Private Investment Program -- better known as Geithner's Plan -- might never live at all.

The Legacy Loans Program [LLP], being crafted by the Federal Deposit Insurance Corp., [as] part of the $1 trillion Public Private Investment Program [PPIP] ... is stalling and may soon be put on hold, according to people familiar with the matter.[...]

PPIP was to be split between the FDIC program, which would buy whole loans, and one run by the Treasury Department focusing on securities. Treasury is expected to push ahead with its plan -- the larger and more substantial of the two -- and could begin purchases sometime this summer.

Given how much publicity -- and controversy -- Geithner's plan received when it was announced last March, that might seem a bit odd. But the reasons appear to be twofold. First, few investors or banks want to work with the government. And second -- and maybe more importantly -- few investors and banks now think they'll have to. The banks, in particular, are apparently enthused by their ability to raise private capital, and now think they can wait out the market turmoil and sell their toxic assets in a few years, when they'll be worth more money.

Which just goes to show that we in the press -- and, for that matter, they in the administration -- haven't been able to perfectly predict which policies and initiatives were most important in the scheme of the crisis. Recently, I asked an administration official which government program we'd remember as making the most difference in averting catastrophe. Where will the history books place the credit?

"It'll be the Federal Reserve," he replied. "It'll be their decision to increase the size of their balance sheet from whatever it was before the crisis to whatever it is now." The Fed's decisions, of course, have attracted relatively less press coverage, both because the Federal Reserve doesn't speak to the press as often as the Treasury Department and because new Federal Reserve policies don't spark tiffs with the Congress, or the Republican Party, or outside economists. As such, the Fed is a bit harder for reporters to write about. But there's some evidence that it will be Ben Bernanke, rather than Tim Geithner, who our children -- at least our nerdier children, the ones who study the recession of 2009 -- will read about.

(Photo credit: Kevin Clark -- The Washington Post Photo)

By Ezra Klein  |  May 28, 2009; 12:00 PM ET
Categories:  Financial Crisis  
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I think you're forgetting one fairly important contributing factor. Bank's perceived balance sheets were greatly improved by the loosening of the mark-to-market rules.
By not having to mark the toxic waste to current market prices, they suddenly needed far less capital to meet capital adequacy standards.

Posted by: flory | May 28, 2009 2:27 PM | Report abuse

That picture of Bernanke is seriously creepy.

Posted by: thehersch | May 28, 2009 4:26 PM | Report abuse

It's almost like Milton Friedman and Anna Schwartz were right: The way to prevent a financial panic from turning into a depression is to grow the money supply....

As I've been saying for months, we'll someday conclude that naive monetarism held the most important key to ending the panic....

Posted by: GarettJones | May 28, 2009 9:20 PM | Report abuse

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