The Geithner-Summers Plan: Let the games begin

In economics, “games” are not about recreation and fun.  Instead, “gaming” a system is figuring out how to get around the intent and profit by out-smarting the rules.  It looks like the Geithner-Summers plan to bailout the banks and get rid of their “toxic assets” is ripe for gaming. From Jeff Sachs of Columbia Univ via Huffingtion Post and the Calculated Risk:

Two weeks ago, I posted an article showing how the Geithner-Summers banking plan could potentially and unnecessarily transfer hundreds of billions of dollars of wealth from taxpayers to banks. The same basic arithmetic was later described by Joseph Stiglitz in the New York Times (April 1) and by Peyton Young in the Financial Times (April 1). In fact, the situation is even potentially more disastrous than we wrote. Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.

via Jeffrey Sachs: The Geithner-Summers Plan is Even Worse Than We Thought.

Will it be L-U-V?

More people are coming around to the idea that the recovery will not be a typical V-shaped recovery like the recessions of the 50’s-80’s.  Instead we’re looking at the U-shaped recessions of 1991 and 2000-01.  Worse yet, it may be L-shaped like the Japanese recovery from the banking crisis of 1990.  Even if we bottom-out later in 2009, the recovery will be slow.

Roger Altman, former deputy Treasury secretary, writes in the Financial Times: Why this will not be a normal cyclical recovery (ht Jonathan)

The rare nature of this recession precludes a cyclically normal US recovery. Instead, we are consigned to a slow, painful climb-out …

What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks.

via Calculated Risk.

What he’s saying (and I agree) is that consumers (households) are too far in debt to begin spending soon.  In addition, their assets which are overwhelmingly their house, 401k, and IRA’s have all lost significant value. Savings must increase to achieve a sense of personal security.  That means consumption must stay low or drop.  No increase in consumption means a slow recovery.