Jeffrey Sachs needs to read more

In today’s Huffington Post, Sachs writes:

Two weeks ago, I posted an article showing how the Geithner-Summers banking plan could potentially and unnecessarily transfer hundreds of billions of dollars of wealth from taxpayers to banks. The same basic arithmetic was later described by Joseph Stiglitz in the New York Times (April 1) and by Peyton Young in the Financial Times (April 1).

Never mind that “the same basic arithmetic” was published by Paul Krugman (and, uh, yours truly) on March 23.  I am sooo past that.  Really.  I am.

Sachs goes on to say:

In fact, the situation is even potentially more disastrous than we wrote. Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.

Here’s how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.

Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan.

Bzzzt!  Sorry, but no.  The Legacy Loans Term Sheet specifically says:

Private Investors may not participate in any PPIF that purchases assets from sellers that are affiliates of such investors or that represent 10% or more of the aggregate private capital in the PPIF.

This is not to say the banks (or simply their creditors) will not find ways to game the system.  Steve Waldman worries about the creditors, and the Financial Times has reported rumors of collusion among banks.   These are worthy of concern.  Sachs’s example is not.

I have my own fears whether the Treasury will be able — or even willing — to prevent these games at taxpayer expense.  But I will give them credit when they at least appear to be making an effort.  And I personally try to familiarize myself with the, you know, details before I engage in public fear-mongering.  I would hope someone with a readership 3-5 orders of magnitude greater would exercise at least as much care.

5 comments to Jeffrey Sachs needs to read more

  • scone

    Huff = tabloid gossip mag. Ick.

  • Unpalatable

    Scone: Gauge what is said by its substance, not the medium. Sachs, Stiglitz and Young aren’t carrying the banner for anything but a better understanding of things.

  • Once an idea gets traction in bloggsville, it rattles around the echo chamber indefinitely.

    Krugman just plugged the Sachs post.

    I’m thinking economists are getting way to much ink. And the number of people with strong opinions that haven’t bothered to even read the original sources is depressing.

  • mittelwerk

    “Sachs, Stiglitz and Young aren’t carrying the banner for anything but a better understanding of things.”

    you must be joking. sachs represents the worst (and already obsolete) strains of blue-sky globalism, and stiglitz seems to pine for some kind of stalinist corporatism (like the repressed commie he is). both are also shitty writers.

  • Unpalatable

    Of course, Mitttelwerk, we should reject anything they have to say because of their underlying economic philosophies and not the substance of their criticisms. Makes as much sense as ignoring them when their comments are posted on a blog. But, I grant that you are correct that one must examine their views critically. Still, all three raise valid concerns regarding Geithner’s bank plan. Nemo’s critique of Sachs’ specific concern is correct, but there are ways to game the system, as Nemo points out, and isn’t that the thrust of Sachs’ post (and Stiglitz’s article)?

    CapVandal is right: economists are getting too much ink. But blogs like this, Calculated Risk, Naked Capitalism, Interfluidity, etc. are properly taking them to task — in real time — point by point. With so much substance to debate, why does anyone waste time with ad hominem attacks on specific blogs and people?

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