I find myself in the Krugman camp, mostly due to the influence of Dean Baker. I believe that housing prices in the US were wildly overinflated and that many millions of people will continue to struggle to pay their mortgages and then won't when they lose their jobs. Loans will not be paid back. Toxic assets are not currently undervalued (I didn't realize people we arguing this! I am slightly horrified. I guess I need to follow more links.) The way out of this recession is not through reinflating housing prices. God no.
As I always say though, happy to be shown I am wrong.
One thing that makes me think Delong is deluded (Chris Matthews ha!) is his belief that the hedge fund managers who are planning to buy the assets and manage them to eventually recover their value are supposedly not going to fuck it up because they have $30 billion of their own scratch in the game. Somehow this incentivizes them to not fuck it up.
Q: Why is the government making hedge and pension fund managers kick in $30 billion?Oh, is that how it works? If they didn't stand to make so many billions they just wouldn't really put the ol' brain power to it, but with billions in profit on the line, they will really get the juices flowing for us? I mean wtf? And aren't these the same McGenuises that just screwed the pooch? Were they just not trying before? Isn't it traditional that when the US gets in financial trouble it "hires" the best and the brightest for $1 a year? [How 'bout we call them dollar-a-year men? Brilliant!] See, the thinking here is that people don't need the incentive of billions in profits derived from government-backed leverage in order to save the American economy. If the American economy is saved, they will make money along with everyone else. If it is not, then no one is making money. It is already in their interest to help save the economy.
A: So that they have skin in the game, and so do not take excessive risks with the taxpayers' money because their own money is on the line as well.
Q: Why then should hedge and pension fund managers agree to run this?
A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested--which is leveraged up to $1 trillion with government money.
Q: Why isn't this just a massive giveaway to yet another set of financiers?
A: The private managers put in $30 billion and the government puts in $970 billion. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year. In this case, the private managers' returns can be thought of as (a) a share of the portfolio's total return proportional to their 3% contribution, plus (b) a "management incentive fee" of (i) 0% of the capital value and (ii) between 0% (if the portfolio returns 3% per year) and 9% (if the portfolio returns 10% per year)--much less than hedge-fund managers typically charge.
the Treasury is only paying 0% of the capital value and 17% of the profits every year.
Q: Why do we think that the government will get value from its hiring these hedge and pension fund managers to operate this program?
A: They do get 17% of the equity return. 17% of the return on equity on a $1 trillion portfolio that is leveraged 5-1 is incentive.
For all of these reasons, this plan looks exactly like a big gamble using leveged government dollars wherein the only people who will end up making any money will be the Wall Street finaciers who just happen to have one of their own in a position of power.
And I am off my rocker here, but why the fuck is Krugman not part of this administration? Let's offer him billions to help us out here.