The critiques of Sachs, Krugman, and Stiglitz do not take this into account

TO BE NOTED: From the Peterson Institute for International Economics:

"Economics of the Geithner Plan
by William R. Cline, Peterson Institute for International Economics
and Thomas Emmons, Peterson Institute for International Economics
April 1, 2009
© Peterson Institute for International Economics. All rights reserved.


The Private-Public Investment Program (PPIP), or “Geithner Plan,” would ironically use
financial leverage to help resolve a financial crisis caused in considerable part by
excessive leverage. As Robert Samuelson, citing Yale economist John Geanakoplos, has
pointed out, a rationale for this paradox is that the process of deleveraging has gone too
far in the opposite direction as loanable funds for leveraged investment have dried up.1
The premise of the plan is that troubled assets on the books of the banks cannot be sold
except at prices far below their long-term cash-flow value because of lack of liquidity in
this distressed market. The PPIP seeks to jumpstart a return to liquidity for this asset
market, thereby setting the stage for a normalization of the banking sector and financial
conditions more generally. A key motive of this arrangement is to use private investors,
rather than bureaucrats, for “price discovery,” addressing a central problem that derailed
the original Troubled Asset Relief Program (TARP) plan of Geithner’s predecessor,
Henry Paulson: the difficulty in determining a price that will be fair to both the taxpayer
and the bank. For this purpose, the government would in effect provide lending to enable
the leverage needed to attract private-sector investors.
Problems with the Critiques of PPIP
Some prominent economists have decried the plan as a giveaway of public funds to the
banks and private investors such as hedge funds, private equity firms, pension and
endowment funds, and others. Jeffrey Sachs has attacked it as a “massive transfer of
wealth.”2 Joseph Stiglitz has called it “robbery of the American people.”3 They as well as
Paul Krugman4 have provided numerical examples of large overpayment by private
investors at the public’s expense.
A fundamental problem with these attacks is that they omit on the benefit side of a costbenefit
analysis the potential gains to the public from an improvement in the economy
that could flow from a normalization of the financial system. Even on the narrower
analytics ignoring such social externalities, however, the analyses tend to make crucial
1 Robert J. Samuelson, “Geithner’s Hedge Fund,” Washington Post, March 30, 2009.
2 “Will Geithner and Summer Succeed in Raiding the FDIC and Fed?” VoxEU, March 25, 2009. For Sachs’
calculations considered in this paper, see Jeffrey Sachs, “Obama’s Plan Could Rob the Taxpayer,”
Financial Times, March 25, 2009.
3 “Geithner Plan Will Rob US Taxpayers,” Reuters, March 24, 2009. For a calculation similar to that
presented by Sachs, see Joseph E. Stiglitz, “Obama’s Ersatz Capitalism,” New York Times, April 1, 2009.
4 Paul Krugman, “Geithner Plan Arithmetic,” http://krugman.blogs.nytimes.com, March 23, 2009.

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assumptions that seriously bias them toward the conclusion that investors will pay far too
much for the troubled assets, and thus that the public will experience serious losses as a
result while the banks and private investors enjoy any gains. This paper will illustrate this
bias using the Sachs results."