Jeff Sachs makes astute but alarming observation

7 04 2009

From Krugman’s blog:

Jeff Sachs comes down hard on the Geithner plan, and his worries need to be taken seriously.

I was starting to come to the conclusion that the plan would simply fizzle — that even though participating players would get a large put along with their free toaster, it wouldn’t be enough to raise the price they’re willing to pay to a level banks would be willing to sell at, rather than keep assets on the books at far above their true value. But once you take into account the possibility of insider deals, that all changes. As Jeff says, a bank can create an off-balance-sheet entity that buys bad assets for far more than they’re worth, using money borrowed from taxpayers, then defaults — in effect a straight transfer from taxpayers to stockholders.

If there’s a mechanism to police such deals, it isn’t clear. And the sense that the administration is just too close to Wall Street continues to grow.

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