You have to give credit where credit is due, and on the just-announced toxic debt stabilization plan, the Obama administration got it right.
The problem has been apparent since last fall. No one knows for sure what the bundled mortgages underlying the toxic debt are actually worth. With that lurking liability on balance sheets, banks won’t lend. Without access to capital, the economy spirals into, and then remains mired in, recession.
To uncork the debt, the Administration’s commendable plan partners the government with private investors in a system to auction the distressed assets of affected financial institutions. Freed from the burden of the toxic debt, the thinking goes, banks will begin lending again, boosting broad-based economic recovery.
In case anyone missed it, let me say this out loud; the Obama administration is going to empower the private market to decide the valuation of the assets through competition.
There’s a word for that.
Capitalism.
What else could explain a 7% daily gain for the Dow after the announcement? By comparison, consider that the week President Obama visited Ohio to tout his Stimulus plan, the Dow fell more than 400 points.
Needless to say, we haven’t heard a lot of support for market-based solutions over the last sixty days. In this regard, President Obama, Secretary Geithner, and his team, all deserve praise.
And it is equally important to note, as Wall Street did, that this is not a no-strings bailout or black hole of dubious government stimulus spending. As the housing market stabilizes, those auctioned assets will appreciate, returning funds to the government and creating a return to private investors. There’s an expression for that too.
The private sector in action.
The question, of course, is whether it will work.
That would have been a less consequential question a year or more ago where the risks and rewards of the private market were better understood and accepted.
But it looks different today given many Democrats’ barely disguised contempt for the private sector and outright hostility toward wealth creation since assuming power in January. Through the Stimulus plan and the Obama budget blueprint, we see that it will be the government that sits in the economic driver’s seat for the next four years, manipulating the tax system and the Federal Register to achieve a vision of social justice.
This was all largely abstract, and subject to considerable wishful thinking until the AIG bonus controversy made congressional contempt and hostility terrifyingly actionable.
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Barney Frank wanted AIG to name names of the bonus recipients to publicly vilify employees whose only crime appears to be their ability to negotiate generous retention agreements.
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Chuck Schumer bragged about Congress’ ability to implement arbitrary and confiscatory taxes to punish “undeserving” employees, guilty of no crime except working.
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The House of Representatives voted overwhelmingly to place a 90% tax on those bonus recipients, a bill so brazen and punitive it will surely face a constitutional challenge if it ever becomes law.
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The draft Senate bill is worse, casting a wider net to cap pay and cut bonuses for employees of entities that accepted TARP funding. The bill is so wide that it captures income beyond the specific employees of TARP-cooperating financial institutions, to include total household income. So if you work for TARP funded Citigroup, and your spouse works for GlaxoSmithKline and makes a good living, you’ll both be punished for your success.
Cooler heads apparently are prevailing in the Senate where Harry Reid has effectively delayed consideration of the AIG bill until after the Easter Recess, hopefully at a time when tempers have cooled and reason, or Washington’s version of it, has returned.
But the damage is done.
Congress’ attempts to out-punish the bonus recipients is symptomatic of the greater challenge for the Obama/Geithner toxic assets plan; a continuing question about the reliability of the US government as a partner.
The tawdry and capricious government interference with firms working through the TARP program should be example enough of how unqualified the government is to manage private sector enterprise. And it is just this kind of government action that can scare off private investors from participating in the program, no matter how favorable Treasury makes the terms.
Unfortunately, investor unease plays right into the hands of those who can’t or won’t see this program as anything but additional government spending.
The distinction is crucial amid the flurry of colossal government spending proposed by Obama as part of his untested presumption to recast American society. In this case, however, the Obama/Geithner toxic assets plan is designed to ultimately recover the largest possible percentage of the billions lost when the market tanked.
The real problem is that this program gets lost is a series of Right Wing attacks as yet another “spending” program, or if Frank and his wealth-hating ilk successfully hamstring the program with gross interventions, scaring off solid investors and leaving the Obama/Geithner plan stillborn.
That would be a crying shame on multiple levels. Most importantly, the American economy and the American people would bear the brunt of continued recession; unwilling hostages to ideologues gone wild on the left and right.