Will the plan to rescue the banks be Obama's downfall?

I made this poster here. The original Geithner photo is from
Examiner.com. My post on "Faireyization" is here.

Most of the economists I read are not happy with Geithner's plan. It uses massive government loans to minimize the downside risk for investors who buy "big shitpile" securities. Here's Krugman ripping the plan apart:

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

Whether this plan is a good one or not, I'm so pissed that we have to clean up this mess in the first place. In the future, whenever I hear someone use free-market ideology to justify some right-wing political stance, I'm just going to laugh in their faces. If there are entities that are too big to fail, then there obviously isn't a free market. If giving enormous amounts of money to very rich people is the only way to prevent massive amounts of human suffering, so be it. But I think spending enormous amounts of money on very poor people to avoid human suffering should happen with much greater frequency and much less whining from the right. Felix Salmon (via Sullivan) wonders if this anger at the financial crisis might have broader political ramifications:

I don't have any answers, but I do have a question: might we might be seeing the first real rumblings of class warfare -- the genuine article, not the Republican talking-point -- in this country?

In one corner are the technocrats not only in finance but also in government and the media: people who can understand the importance of distinguishing between a $250,000 base salary, a $2.5 million bonus, a $250 million bonus pool, a $2.5 billion bonus pool, a $250 billion bailout package, a $2.5 trillion monetary stimulus, and so on.

In the other corner are the real people, the angry people, the unemployed people -- and with them their elected representatives in Congress. They're not interested in such distinctions any more, they're not interested in what's fair or what's sensible. They saw their real wages stagnate for decades as the orgy of plutocratic self-congratulation reached obscene levels only to keep on growing.

Salmon seems a bit disdainful "the real people, the angry people" here. I think many "real people" are very interested in what's fair and what's sensible, and they are rightfully angry because the things they see happening aren't fair and aren't sensible. And many wonky types who do understand about orders of magnitude and the different kinds of money in question are just as pissed, if not more so, than the "real people". Krugman certainly seems ready to knock some heads.

That issue aside, I do wonder if this anger will be translated into a meaningful political re-alignment and re-balancing of power between the different economic strata in our society. I doubt this will happen. It's still easier to succeed within the system than to overthrow it. And I suspect any potential proletarian revolution could be successfully bought off or distracted by an external threat. But there does seem to be some sort of rumbling going on, some realization that the Calvinist equation of wealth=virtue might not hold up in all circumstances. The unsettling notion that the dream of great material prosperity can be a delusion as well as an inspiration. The idea that sometimes, the powerful exploit the weak, and maybe, just maybe, we're being had.

These aren't thoughts that most of us permit ourselves to think very often. We've been told that they're un-American, that they're "class warfare" (the appearance of that phrase is a tell that someone's trying to defend a plutocrat). But it's pretty hard not to have those thoughts these days. If everyone who was pissed about AIG were un-American, there wouldn't be any Americans left.

Obama, I love you, dude. You've done a lot of good things. But this could really damage the country and also mess you up politically. Maybe this is all part of some complicated jiu-jitsu scheme you and Axelrod have cooked up. I hope so. But you have to realize that these assets may not be worth what you want them to be worth. And you have to realize that people (and I'm one of them) feel that it is unjust to use taxpayer money to subsidize the very institutions and people who contributed enormously to our current hardship. Until you address that sense of injustice, and do something to redress the wrongs that are the source of it, there will be an enormous political vacuum in the American landscape. And God knows what will rush in to fill that vacuum.

UPDATE: Yglesias puts forward an idea that might address some of the fairness issues raised by this plan: Let the public get in on the same deal. Note that this would not address the issue that these auctions would use government money to artificially inflate the values of these assets.