Obama's Economic Recovery Plan is Wrong Way to Go

President Obama, with new White House lap dog Timothy Geithner in attendance, announced vague details of a three-part scam Monday that will "partner" the government with private investors to purchase up to a trillion dollars of "toxic" loans from the nation's banks, as well as purchase near-valueless securities backed by near-worthless loans.

After starting its bank capital investment program (read "nationalization"), the Treasury plans to use $75 billion to $100 billion in funds from the Troubled Asset Relief Program, or TARP, to tackle the last (at least for this week) problem of the financial crisis: "toxic assets," which are billions of dollars in worthless mortgage loans left from the real estate bubble that are now acting as a choke collar on the economy.

That sounds really good, until you hear how they plan to pull off this financial sleight of hand.

First, the Treasury will set up "public-private investment programs" (PPIPs) to purchase these "toxic" loans from banks at a deep discount from "face value. To finance the PIPPs' purchase, the FDIC will loan the PIPPs around 80% of the purchase price, with the Treasury and the investors contributing equally to the down payment. An example will clarify this part of the scam.

Investment Company "A" and the Treasury Department form a PIPP. Bank "B" has pre-recycled toilet paper that was, at one time, worth $1 million but is now worth about $15.34. Bank "B" sells its scrap paper to the PIPP for $800,000. Investment Company "A" puts up $100,000 of its own money, the Treasury Department puts up $100,000 of our money, and the FDIC "loans" the PIPP $600,000 (actually, it only promises pay the $600k if the "A" and the Treasury run into problems). Now, here's the deal so far.

Bank "B" sells something that it once paid $1,000,000 for to Investment Company "A" and gets $600,000 plus a $400,000 tax write-off. The 600 grand will, in theory, make more money available for lending and help the economy recover. When the economy recovers, the value of the formerly worthless paper, which Bank "B" unloaded onto Investment Company "A" is now worth $200,000 more and both the company and the Treasury split the profit.

There are only two minor problems with this plan:

1) There won't be a profit of $200k unless the investment can be sold, to someone, for $1 million.

2) What happens if the economy doesn't recover fast enough for tax revenues to pay for the FDIC's financing of the original $600,000?

Although these minor problems are not mentioned in Pinocchio Geithner's game plan, they still must be considered because:

1) After all the grief caused worldwide by mortgage-backed securities in the past two years, it will be very difficult to find someone who wants to buy anything associated with a mortgage. You probably won't be able sell a first mortgage on the Temple Mount, with God the co-signer, for at least another five years!

2) The federal government is predicting that, for once 220+ year history, is finally going to get something right. In other words, they're betting the farm (along with Alaska, the American Virgin Islands, the national treasury and, (if it wasn't for Jimmy Carter, the Panama Canal) that it can cure the recession by spending money that it doesn't have on the chance that its idiotic policies can work a miracle. Since this is the same government that told us that Pearl Harbor was a safe place to park the Pacific Fleet, and that there was nothing funny going on at Enron, I am not overwhelmed with confidence.

For more preliminary details on this government-sponsored Ponzi scheme, grab an airsickness bag and head over to Press Room - U.S. Department of the Treasury.

If there was ever a time to remember the old saying about "If it sounds too good to be true ..." this is it.