On the McLaughlin Group Friday night, one of the commentators closed the circle for me on the sub-prime issue. He said that the developing nations, particularly the Chinese, had nowhere to put the huge stash of US dollars that they had made from global trade and the US consumer. The answers to their dilemma were the sub-prime loan packages, investments enabled by Fannie Mae and Freddie Mac and guaranteed either by the US government implicitly or by "insurance" from AIG explicitly. These packages fed the hunger overseas for a "safe" US investment that paid a good return. (Thus, much of the money the government has paid to AIG has gone overseas to pay-off insurance claims made in respect of these "toxic" investments, for we really would like the world to continue to invest in the US.)
Treasury Secretary Geithner describes his "Public-Private Investment Program" on the Op-Ed page of the WSJ this morning, and it's worth reading. It strikes at the heart of the sub-prime loan problem. The heart of the problem is this: What in the world are the sub-prime loan packages worth?
The government has been afraid to get out of the way and let the market place determine that question, because it believes that the process of allowing the market to make that determination will devastate the economies of the world. Furthermore, powerful people in government are afraid that blame for the devastation will be traced back to them. If, then, they can simply "manage" the problem, maybe they can avoid being held accountable. But this is obviously not working. The economies of the world are under great stress, and I believe that citizens are beginning to figure out how unclean are the hands of the people in Washington who purport to be telling us how they are going to solve the problem.
The Geithner proposal allows for the market place to get back into the valuation process. And maybe we will see whether these loans are worth anything. My guess is that there is value there. The question is whether investors in the private sector will be able to develop useful notions of value and, then, will come to the Secretary's party. Congress is not helping by threatening to abrogate the laws of contract, nor the President by proposing economic policies that will lead to massive inflation and tax policies that will take away rewards for risk-taking. But I suppose the market can even discount for those problems. So we'll see if anyone bites on the Secretary's proposal.
UPDATE: The Market likes the plan. So far. The front-page headline in the WSJ today (3/24) is "Toxic-Asset Plan Sends Stocks Soaring."