Timothy Geithner today is scheduled to release details on the government’s plan for relieving the burden of toxic assets on the financial sector. Essentially the plan has three parts:

- Setting up a public-private partnership that will share half the cost with private investors of buying toxic assets. This may use up the rest of the first bailout fund.
- Use part of $1 trillion dollars from the Fed to extend loans to investors purchasing toxic assets
- Include FDIC support in helping deal with toxic assets and failing financial institutions

Total Cost to Taxpayer: $1 Trillion

While the plan is not perfect, some believe that it can help bring us out of the current recession, at least as a first step. The first problem I have with this plan is that it essentially makes the taxpayer pick up half the tab in order to help financial institutions free themselves of their own bad decisions. Second, it accelerates the use of taxpayer funded bailouts, possibly putting pressure on Congress to pass another bailout in case this doesn’t work fast enough or at all. Third, given that the government is paying for part of the toxic assets, whose value is not known, banks may decide to inflate their price at the taxpayers’ expense. Fourth, it is unknown if private investors are ready at this point to start buying up bad assets, even with the government incentives being offered. Fifth, if they do start buying up these assets, essentially the government has decided to hand over money to hedge fund managers and investment firms (they’ll be the ones buying the toxic assets), making this the third or fourth bailout of Wall Street.

All in all, it’s the market that will determine if this is a good move for the economy and if credit markets will start opening up. If it goes as planned, we will start seeing some movement by the end of the year according to Christina Romer , an Obama economic adviser. Personally I believe that while this may start solving the lending problems with the economy and help buoy the market, the effect on the taxpayer and the deficit may prove to be another problem altogether. That is the problem with government intervention, and I guess physics, for every action there is an equal and opposite reaction. All we are doing is shuffling around these bad assets with the hopes that over time they become profitable, and if they don’t, it’s okay because the taxpayer will just pay for it… like we’re paying for $1.487 trillion in bailouts, $1.2 trillion in newly printed money from the Federal Reserve, $410 billion omnibus bill passed by Congress recently, and $3.6 trillion dollar budget proposed by the Obama administration. In the meantime, the Corporate Socialist economy continues unabated.

-AG