In the latest iteration of the government's plan to save the financial system, Treasury Secretary Tim Geithner says the government will give money to both banks and private investors. The money is an incentive for the banks to sell their toxic assets and an incentive for the investors to buy them. Apparently, we have to pay both sides to make a deal happen.
Geithner made his comments on the Charlie Rose show last night. Let me point to one exchange in particular:
Rose: You're saying you have private investors who are prepared to step forward and buy these toxic assets, if, if...
Geithner: If they're able to get financing from the government. Because again, that financing is unavailable now. So that's one of the kind of important things a government has to do in a financial crisis, cause again, financial crises reflect an unwillingness by the private sector to take risk, because of uncertainty and things they just can't do (inaudible)... and that's why governments have to step in in financial crises and take risks the market would otherwise not be prepared to take.
Geither mumbles the part about "things they just can't do." How telling. Yeah, things they can't do NOW. Before the financial crisis, the private sector was willing to take plenty of risk. And today, the New York Times has a great explanation of why. The Times points out a research paper written in 1994 called "Looting." It was written by economists George Akerlof and Paul Romer.
They argued "that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses."
The Times interviewed Romer:
"If you think of the financial system as a whole, it actually has an incentive to trigger the rare occasions in which tens or hundreds of billions of dollars come flowing out of the Treasury."
Or maybe trillions? So now, the taxpayers have to provide an incentive (bribe?) to banks and investors to untangle the mess they had an incentive to create.
Here's the entire Geithner/Rose interview: