From NBC's Athena Jones
The Treasury Department released a long-awaited plan to help deal with the troubled assets at the root of the credit crunch that's crippling the economy.
The plan would use a combination of public and private money to encourage the purchase of as much as $1 trillion in bad loans, or "toxic assets" -- which the administration calls "legacy assets" from banks.
"We believe this is one more element that is going to be absolutely critical in getting credit flowing again," President Obama told reporters after his daily economic briefing, where he was joined by Treasury Secretary Timothy Geithner, FDIC chair Sheila Bair, Fed chair Ben Bernanke, and other economic advisers. "It's not gonna happen overnight. There's still great fragility in financial systems, but we think that we are moving in the right direction."
Getting banks to lend again is key to future economic growth. The Public-Private Partnership Investment Program is the latest in a series of programs the administration has introduced to try to reverse a slowdown that has cost millions of jobs. The other plans include one geared toward reducing home foreclosures, another designed to help jumpstart consumer and business lending, and a third to strengthen banks' balance sheets with capital injections.
Both Obama and Geithner have highlighted some areas of progress as a result of these programs, such as signs of stabilization in the housing market.
Under the latest program, the Treasury Department -- working with the Federal Deposit Insurance Corporation and the Federal Reserve -- will use $75 to $100 billion in TARP capital, combined with capital from private investors to generate an initial $500 billion in purchasing power to buy bad assets. The value of these assets would be set by the market and any risk or gain associated with them would be shared by taxpayers and private investors.
In a Wall Street Journal op-ed today, Geithner explained that the program would provide a market for these assets that does not now exist, thereby helping to improve asset values over time, increasing banks' lending capacity, and lessening the uncertainty about the size of losses on bank balance sheets.
If the new plan works, banks will start lending again; consumers will be able to get the money they need to buy cars and homes and send their children to school; and businesses will get financing to expand inventories, keep up with their payrolls, and start hiring new workers.
The question, though, is whether the federal financing will encourage enough private investors to take part in the program and just how quickly or extensively it will boost bank lending.
The market appeared to be responding positively to the plan, but economist Paul Krugman, a New York Times op-ed contributor and frequent Obama critic, was brutal. He wrote that the "hocus pocus" plan filled him "with a sense of despair," compared it to what he called the "cash for trash" plan proposed and abandoned six months ago by former Treasury Secretary Henry Paulson and said it would not work and would only result in further squandering Obama's credibility when time was of the essence.
"[T]he Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt," Krugman argued. "So this isn't really about letting markets work. It's just an indirect, disguised way to subsidize purchases of bad assets."
In an interview with CNBC, Geithner said the alternative to this plan would be letting these toxic assets remain on banks' balance sheets, which he argued would create a "much longer, deeper recession."