Sachs on the Geithner Plan

Jeff Sachs has a nice piece in the FT on the Geithner plan.  Sachs is against it and explains his objections with a very clear numerical example.  Of course, readers of this blog have seen this kind of thing here already but Sachs makes an additional useful point that hasn’t been discussed here.

It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries.

This point is important in an Irish context because our government is discussing its own plan to overpay for bad bank assets.  It is natural for media commentators to interpret stocks going up as good news as usually this corresponds to good news about the broader economy. However, in this case, it should be remembered that stocks are just a claim of a particular group of investors on a particular sequence of future dividend payments.

Bank stocks rising on news that the government is likely to adopt such a plan—and probably rising a lot more if the plan is implemented—should be interpreted as good news for bank shareholders, but not necessarily as good news for the taxpayer.  There are better ways to solve our banking problems and analysis along the lines of “the market is reacting positively to the plan” misleads the public into thinking that plans like this represent good public policy.

5 thoughts on “Sachs on the Geithner Plan”

  1. Karl!
    Well said! But you realize that when there is nothing but bad news and this is bad news, then spin is vital. Why do you think the reports are as they are? Just journo error? Why always the same error? Why no analysis that makes economic sense?
    In the kingdom of the blind it may be folly to open your one eye?

    This is what happens as a paradigm changes back!

  2. Karl!
    Well said! But you realize that when there is nothing but bad news and this is bad news, then spin is vital. Why do you think the reports are as they are? Just journo error? Why always the same error? Why no analysis that makes economic sense?
    In the kingdom of the blind it may be folly to open your one eye?

    This is what happens as a paradigm changes back!
    Sorry, forgot to add great post! Can’t wait to see your next post!

  3. I think its bad news for the taxpayer no matter what happens, and saying ‘shareholders benefit’ is not strictly true either, how does a person who lost 99% still ‘win’?

  4. Shareholders who owned the shares two weeks ago have already seen their shares rise by 50%. Suppose that Sach’s calculation is correct and the potential $1 trillion in Geithner plan money buys the assets for twice the price. That would imply a $500 billion transfer from the taxpayer to the shareholders. Even dividing that by ten, it would constitute a very considerable “benefit” to the current shareholders.

    Also, at this point, these shareholders are probably a very different group of people to those that owned the shares a year ago, many of whom will have chucked in the towel at various points along the way. I would guess that a significant fraction of the shares are owned by investors explicitly hoping that the US government won’t be willing to nationalise and will try to save the banking system via providing lots of free money to shareholders. Right now, that bet’s looking pretty good, so I wouldn’t spend too much time feeling sorry for these particular shareholders.

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