Obama Accepts Geithner's Reaganomics Solution

The same people that got the Nation into its current financial crisis are not the ones to get us out.

Take the case of Tim Geithner, President Barack Obama's Treasury secretary. Geithner, the former head of the New York Federal Reserve Bank, was behind the scripting of the loophole in the stimulus bill that allowed AIG bonuses. It was Geithner who resisted those wishing to dictate how banks would spend their rescue money. And it was Geithner, who recently persuaded the President to pay "cash for trash," a plan proposed, then abandoned, six months ago by then Treasury Secretary Henry Paulson.

The "cash for trash," plan assumes that: 1) banks are fundamentally sound, when they are not; 2: Bank management acts in the best interest of the people, when they do not.

His latest scheme lends taxpayer money to investors who will purchase toxic assets. This, he presumes, will drive the assets to "fair levels," thus give investors a clear profit. If, and this is the rub, the assets go down, then investors can walk away from their debt.

This is nothing more than a twist on "trickle down-Reaganomics" whereas taxpayer money is transferred to the wealthy investors, who make a fortune if the assets rise and loose nothing if they do not.

Given this type of logic, the Fed should simply pay off the toxic assets (upside down homes), and if the property raises in value, then return the funds to the treasury. If the property looses value, no harm, no foul. Why have banks in the middle?

If the idea of the Obama-Geithner plan, is to use the market to set the value of toxic assets, then why not expand the reverse-mortgage program to individuals who are upside down, or otherwise unable to make the aggressively high interest rate payments. This puts the funds directly into the hands of the asset owner

Of course, many of the toxic assets have been abandoned by the purchaser and are held by lenders. In those cases, wherever possible, local banks should encourage qualified people to "lease" the asset and share in an appropriate rate of return after a given period of time. .

Pushing taxpayer money down to the lowest possible level will help break-up the complicated financial mess that the so-called "financial experts," have gotten the nation into.

Certainly, individuals who purchased property, either on speculation, or as a residence, deserve some blame for their "careless," decisions. But this is not about blame, it is about re-stimulating the economy while moving the lending and asset management process down to the people.

There may be many reasons why expanding the reverse-mortgage program down to the lowest level, but there are equally compelling reasons for eliminating greed and incompetence from the process.

Regardless, the Obama-Geithner plan will not work. Greedy financiers bet that housing prices would continue to rise, and the ability of individuals to carry the burden would continue forever. The inevitable consequences of the gamble was collapse.

It's politically and economically critical for the President to get the economy on course. Such action must not encourage more Wall Street greed and must correct the dysfunctional financial system. It is those two components - greed and a systematic dysfunctional system - that created the huge losses on mortgage-backed securities and other assets that crippled the economy.

This is not a new story. And, in those situations the Government secures confidence in the system by guaranteeing solvent or potentially solvent banks. Then, it takes temporary control of those that are insolvent and cleans up the books. That's what Sweden did in the early 1990s, and what the Government did during the savings and loan crisis of the Reagan years.

The reverse-mortgage process adds additional value to the Sweden plan by putting an asset ( a home) into the hands of people who need the confidence of stability that comes with home ownership.

The President must immediately reject approaches that put their trust in the free-marketeers who insistence that the bad assets are really worth more than anyone is currently willing to pay for them. Clearly, if their true value was so high, then the banks wouldn't be in trouble.

Letting people, who are upside down in the world of toxic assets, while the Fed cleans up the books, in essence allows individuals, not large bankers, to ride out the storm.