Trillions of Dollars Down a Black Hole

Obama, like Bush, is Throwing Public Money into a Black Hole
by Prof. Rodrigue Tremblay

“The [financial] crisis was not a failure of the free market system and the answer is not to try to reinvent that system. …Government intervention is not a cure-all.” President George W. Bush, Thursday November 13, 2008

“There is no cause to worry. The high tide of prosperity will continue.” Andrew W. Mellon, Hoover’s Secretary of the Treasury. September 1929

“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.” President Herbert Hoover, May 1, 1930

Tuesday, February 10, may be the date when the U.S. economy officially entered into an economic depression. This was when President Obama’s Treasury Secretary, Timothy Geithner, announced that the Obama administration was about to expand Bush’s Secretary Paulson’s $700-billion plan to rescue large U.S. banks from insolvency, euphemistically called the Troubled Assets Relief Program (TARP). The purpose now, as it was previously, is to use public capital, loans and guarantees to remove toxic financial assets from private banks’ balance sheets and to transfer them to the Government and/or to willing private investors (hedge funds, private equity firms and other investors). One must keep in mind that Mr. Paulson and Mr. Geithner were the principal architects of last October’s original plan. This was then, and it is now, a plan designed primarily to use hundreds of billions of taxpayer dollars to prevent banks from declaring bankruptcy, while in fact doing little to accomplish its presumed primary objective of getting banks to resume normal lending. Such a cure has failed in the past and is likely to fail now. Saving insolvent banks is not the same as fixing them and making them viable.

Indeed, when Mr. Geithner announced on Tuesday, February 10, that he was expanding the Paulson plan to make it a $1.5 trillion bailout plan, financial markets saw it as simply rearranging the chairs on the deck of the Titanic, and they sold off. I believe the markets are right and the Obama-Geithner plan only makes the Bush-Paulsen plan worse. Both are misguided and do little to address the root cause of the financial crisis, which is a mountain of unsustainable bad debts that was allowed to expand recklessly over the last ten years, and which is now crumbling down, dragging the entire economy down with it.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal

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