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Wednesday, July 20, 2011

I was right and Stiglitz and Krugman were wrong. Mike Konczal was wrong too. He sent me back to this post

Astute readers will notice that the action of government officials using public funding sources to provide makeshift backstops for losses of the banking sector to clear the balance sheets of toxic assets to “unlock the frozen credit market”, without having to go to Congress for funding, was also a central feature of Geithner’s PPIP plan, with FDIC stepping up to the plate once the GSEs went bust.

In fact FDIC didn't step up to the plate. For all I know, Geithner might have secretly dreamed of using the PPIP to make the FDIC bear risk and, ex ante, transfer tens of billions to shore up private banks. But the PPIP didn't force the FDIC to do anything. The FDIC kept a veto and used it.

To be fair, one might say that the FDIC stepped up to the plate but didn't swing at any sucker pitches and walked.

Also Konczal was and is very right that the GSE bailout cost a ton, because the GSE's were used to covertly bail out private entities. For some reason they bought a lot of toxic waste at prices no one else was willing to pay at the time when Paulson was desperate to bail out banks and dealing with a recalcitrant congress. A good move I guess (I think he saved the world economy) but not evidence that the government sponsoring was the source of problems -- rather it was key to a painful but necessary solution.

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