forget the stimulus

all the wrangling in congress and the senate is chump change compared to what's going to happen by fiat at the treasury department. while the elephants and the asses continue to play pork barrel tug-of-war, geithner has announced his extremely expensive plan to tackle the financial crisis. what, then, will the damage be?

- $1 trillion to guarantee triple-A rated securities backed by consumer debt-packages (student and car loans, credit cards, etc.). A program for this purpose already exists, but so far has only represented $200 billion worth of promises.

- Between $50 and $100 billion in funds for underwriting failed mortgages. Some of this will be distributed directly through Fannie Mae and Freddie Mac, and some will be used to subsidize private lenders.

- An unspecified sum for capital injections into banks in the form of convertible preferred shares. For those of you not familiar with preferred shares, they are the first to pay dividends but do not offer any voting rights.

And, the coup-de-grace

- $500 billion for the Bad Bank (though most analysts seem to believe that $1 trillion is a more likely sum). Geithner is unclear on how repricing of bad securities will be carried out. It looks, at least, like the Treasury will not allow a third-party to price the assets so that they can be auctioned off to the private sector. A 'public-private' partnership is now the new buzz word. This sort of strategy involves public capital leading private to buy up the assets, thus creating a market for them and, it is supposed, a reliable price mechanism--one backed by the assurance of federal funds.

I'm sure the most important question on everyone's mind grapes is whether or not this plan is shit, and if it's colossally costly shit. While the numbers are big, some of them are, for the moment, costless strategems for generating confidence. Guaranteeing securities with perfect credit ratings doesn't involve pledging any actual funds, unless credit markets go belly up again (which it might, still). In that case, the Fed has wide leeway to promise as much money as it wants. Since these securities are so, well, secure, insuring them further is meant to coerce banks into lending again. I am no financial wizard, but I think that this is an empty gesture. The securities in question are triple-AAA, and banks are most certainly aware of this. They don't need any insurance to make them safer. What is far more important as an indicator of a continuing credit freeze is recent USD LIBOR activity, which shows an upward trend across the board after a brief downward spike last month. This is especially true in comparison to euro LIBOR, a measure which has collapse by 50% during the same time period. The bottom-line is that dollar borrowing is expensive in absolute and relative terms, and there is the likelihood that that will continue to be the case as the Treasury looks for new funds for its interventions.

Details on the Bad Bank are also sketchy, especially now that this public-private collaboration is the primary strategy. The government is wary of so-called 'financial socialization', which is why, I suppose, so much emphasis is being placed on using private capital. Without more details on how pricing is expected to come about, I can't say if this strategy seems sound or not. That may, in fact, be its biggest problem, or these initial stages may be bunk, and there may be a complex and well-coordinated plan in the works.

But something else about what Geithner said gives me reason to be suspicious of him. His comments on the plan seem absent from a lot of major reporting--Reuters and the FT don't bother to include them, though the Times does. I think that this was a gross omission; the devil is there, lurking in the tall-grass of the details.As the Times puts it:

Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by [Obama's] presidential aides ... The $500,000 pay cap for executives at companies receiving assistance, for instance, applies only to very senior executives ... the plan also will not require shareholders of companies receiving significant assistance to lose most or all of their investment ... Nor is the government announcing any plans to replace the management of virtually any of the troubled institutions ... Finally, while the administration will urge banks to increase their lending, and possibly provide some incentives, it will not dictate to the banks how they should spend the billions of dollars in new government money.

If we're going to stick to capitalism (in case you had hoped otherwise, that decision was made for you) we do need to have private capital, and private capital does need to participate in markets. Building incentives for private capital to move is sound. Unfortunately, I don't see them in this plan. By relying on existing financial institutions and their pre-crisis management, there will almost inevitably be deadweight loss as pay structures and incentives inefficient for the purposes of restructuring financial markets divert money from its most productive employment. Without any more radical moves markets will do what markets have been doing, and LIBOR will be a better indicator of what credit markets think than any of the Treasury's most lurid pipe dreams.