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.