“what is going to be required is a judgment we don’t need to make at this time..”

In somewhat related news, the US Treasury department plans to buy up to $1 trillion worth of toxic assets – with a little help from private investors..

The Treasury does not know whether it will need more federal funds to stabilise the US financial system, but it still has “substantial resources” from the $700 billion bailout to launch its asset purchase plan, Treasury Secretary Timothy Geithner said today.

“We will work with the Congress to try to make sure there are enough resources over time to do this right, but the judgment about what is going to be required is a judgment we don’t need to make at this time and are not prepared to make at this time,” Mr Geithner told reporters during a briefing.

He also said the administration will work with Congress to make sure executive compensation restrictions do not hinder the government’s economic recovery efforts.

The BBC’s economics editor, Stephanie Flanders, identifies the problem

There’s no getting around the basic fact that 93% of the risk is being borne by the US government – 7% in the form of straight equity and the rest in the form of lending guaranteed by the government which is only secured by the asset being bought. If those loans turn out to be worth nothing, it’s the taxpayer that’s going to pay most of the price.

If you start from the position that banks cannot be allowed to go bankrupt, and they cannot be nationalised, this may be as good a scheme as you are likely to get. The problem, as I said at the start, is not the detail but the basic idea.

Geithner has to offer such attractive terms to private investors because he knows that without such enticement, the gap between them and the banks will be too large.

After all, why would the banks want to accept a low price, when the administration has shown it will do almost anything to avoid taking the banks into public hands?

Clever though it is, that is the basic incentive problem which this scheme cannot design away.

Whilst everyone’s hero, Robert Peston, spots the difference between there and here.

Even allowing for important differences between the two schemes, such as how the assets are valued and what share of loss goes automatically to the private sector, there’s little doubt that in this instance, US taxpayers are less at risk of loss than British taxpayers – which is another way of saying that it represents a more modest “bailout” (to use the emotive phrase).

Geithner seems to be hoping that the mere existence of buyers for these hard-to-sell assets will lead to a rise in their market price, thus strengthening US banks’ balance sheets even if the banks retain the relevant assets.

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