Toxic-Asset Buy-Up: “Pure Plunder”?

People who have actually read the fine print of the Administration’s trillion-dollar toxic asset buy-up program don’t like it. One calls it “pure plunder.”

Both liberals like Nobel Laureate Paul Krugman, and conservatives like Chris Stirewalt, sum up the program as “Heads I win, Tails the Taxpayers Lose.”

Others argue it provides “public subsidies” for hedge funds that don’t need them, and for “zombie banks” that ought to be shut down to cut the taxpayers’ losses.

Even Harvard business law professor Lucian Bebchuk, who once advocated buying up toxic assets, now says that taxpayers may end up being fleeced by the toxic asset program, and that it would have been better and cheaper to let AIG go bankrupt rather than spending $170 billion bailing it out.

In essence, the U.S. Treasury will “become the new AIG. In order to get hedge funds to buy up toxic debt, Obama is proposing that the Treasury provide loans up front and insurance against potential losses on the back end.”

The Administration claims taxpayers won’t lose a full trillion, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why does it continue to enforce accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules rightly value assets — in which case taxpayers may end up losing a trillion dollars — or they are wrong — in which case the rules should be repealed, so that banks, not taxpayers, can take on the risk of holding the assets. (If these rules, known as “mark-to-market” accounting, had been in place in the 1980s, “every major commercial bank would have collapsed.” As we noted earlier, many banking officials, economists, and lawmakers support junking those accounting rules).

Many bailouts, like the $170 billion AIG bailout, have been grossly wasteful, as former banking regulator William Seidman notes. For example, “We paid off huge debts that AIG had in the swaps market, which we probably did not have to do.” That includes paying billions to AIG customer Goldman Sachs, which Goldman readily admits it did not need to survive.

Don’t trust politicians who say their spending programs are needed to avert disaster. Obama claimed the $800 billion stimulus package was needed to avert “disaster” and “irreversible decline.” But the Congressional Budget Office admitted that the stimulus package would actually shrink the economy in the long run.

In the Asia Times, Martin Hutchinson notes Fed Chairman Ben Bernanke’s role in spawning asset bubbles and the current financial crisis, his refusal to face his mistakes, and his inflationary policies, which now threaten to erode the dollar’s status as the world’s reserve currency (impoverishing America in the process).