A government program has to have a catchy name. So it was that Treasury Secretary Timothy Geithner introduced the Public-Private Investment Program. This is the latest plan to save the banks and free up credit. According to this plan, the government will work in partnership with the private sector to buy up so-called toxic assets from the banks. The hope is that by removing these assets from the banks' balance sheets, banks will be more willing to lend.
The first thing you should notice is who gets top billing in the name of the plan. It is not called the Private-Public Investment Program for a reason. The government wants to make sure taxpayers come first.
The next thing you should ask is will the program work as planned? This program assumes that banks are not lending because of these toxic assets. It fails to consider the possibility that maybe businesses don't want to borrow. In general, businesses borrow money when they want to expand. When demand is strong and they are growing, they have to finance that growth. But when there is a recession and demand is weak, there is no point in expanding so there is no need for financing. Of course, this is a bit of a Catch-22. The recession won't end until businesses borrow and invest. But businesses won't invest until they are convinced the recession is coming to an end.
You should also ask if the banks even want to sell all those toxic assets in the first place. After all, they have already marked them down. They may prefer to wait until the markets improve so they can benefit by marking them back up. Of course, there is a price for everything and banks will sell at the right price. But the public-private partners will want to buy at as low a price as possible. A little arm-twisting by the government may be necessary to convince the banks to sell.
Nonetheless, Secretary Geithner's new plan is the best plan we have seen to date. The market certainly liked it and rallied strongly in response. Geithner has been criticized for talking in generalities and providing no specifics about how he will respond to the financial crisis. This time, he gave us specifics. Those who were shorting Geithner and calling for his resignation got a little burned. Today his stock went up at least a few points.
