You are staring at the bumper in front of you as you drive to work and half listen to the radio. As you sip your hot coffee with Splenda, you hear about “Geithner’s $2 trillion plan to remove toxic assets and restore liquidity to the financial sector.” Huh? What the heck does that mean? Maybe one of the reasons we have reacted so strongly to the AIG bonuses is that at least we can understand the issue. Taking money from taxpayers and giving it to executives as a bonus for destroying a company: bad. $2 trillion for removal of toxic assets: who knows? Perhaps if we have a better understanding of this economic mess, we can hold Congress accountable for acting like Red Bull crazed 9^th graders.

So, I’m going to try to lay this out.

Geithner: Our Secretary of the Treasury, appointed by President Obama and approved by Congress. He largely works alone, since some members of Congress (who are supposed to review the appointments of Assistant Secretaries) have become so antagonistic and unpleasant that they have scared off anyone from becoming one of Geithner’s  assistants. Tough job! Lonely at the top!

$2 trillion: A heck of a lot of money! In the plan, the government would provide about 90 cents for every 10 cents that American citizens invest. So, the government invests $1.8 trillion. Hey, wait a minute. That really means that taxpayers put up 90 cents, then wealthy tax payers put in 10 cents. Hmmmmm.

Toxic assets: Banks made really bad home loans, then put the loans into groups. They sold the groups of loans to other American banks, Chinese banks, and banks in Finland with Ikea furniture in their newly redecorated lobbies. The groups were purchased, believing that people would keep paying for their loans. When the price of housing in America dropped, banks that bought the groups of loans ended up having bought groups of loans that would not be repaid. It became impossible to value the groups of loans, because no one could figure how many people would keep paying for their homes. So, they became “toxic,” in that banks had said their groups of loans were worth a lot more than they turned out to be and lots of people and companies were stuck with worthless paper, not even suitable for framing.  

The Plan: Secretary Geithner (and President Obama), have crafted a plan that tries to give people a reason to buy the lousy groups of loans, or “toxic assets.” Since no one is sure what these loans are really worth, the plan removes the risk of buying them by asking people to put in 10 cents for every 90 cents the government invests. So, if the loans are only worth 10 cents on a dollar, you break even. The hope is that people will help the government buy the bad loans, remove them from the balance sheets of banks, and help banks lend money for real things again, like Hummers made by General Motors.

Can it work? That’s the big question economists are discussing today.  It’s kind of a fun argument, like when two people who really don’t know what they are talking about get really adamant about their specific view, which, unfortunately, can be proven either way. Think Calvinists verses Armenians, Catholics verses Protestants, or maybe Yankee Fans verses Mets fans (though the last example seems pretty clear to me. 26 championships. Enough said). Anyway, most people seem to agree that it is too small of an amount to really make the difference that is needed, but should help in the short-term.

SOOOOOO? So what’s all the fuss? Why is President Obama doing this? Here is my read: The only way to fix the mess the banks are in is to “nationalize” the banks, which means the government will have to take control of many banks, put a real value on the groups of bad loans, make up the difference with taxpayer money, then bring the banks back to the private sector when they are cleaned up and suitable for public consumption. BUT, there is no way that Congress is going to go for that now. The Republicans have been very consistent about opposing everything the Obama Administration brings to it. People are still in a tizzy about AIG. So, in order to buy time, the Geithner plan is put into play. I suspect that it will be good for four to six months, then you will begin to hear about nationalizing banks again. It’s inevitable, but must be properly timed for Congress to buy in and the rest of us to believe it’s needed.