Is Obama’s Toxic Asset Plan Another Misplaced Cash Advance?

What’s the New Plan About? 

As the government’s Toxic Asset Plan rolls out to deal with the present macroeconomic situation, the only question on everyone’s mind is whether the stimulus plan will actually work or go down as yet another misplaced cash advance.

The Financial Times has summarized the PPIP toxic asset plan in one line,

“Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loan.”

The President’s Stand

Mr. President is very sure that this latest attempt to heal the wounded U.S. economy will work. What remains to be seen is how and more importantly, when. American people are tired of the short-term, quick fix solutions thrown at them by the previous Bush government and now this administration. Now, they seek more than just a huge cash advance. There’s no headroom for creating any more bubbles to redress the critical problems afflicting the economy.

Stimulating or Averting Plan

A closer look at the Toxic Asset Buyout Plan reveals that matters could get far worse than they are for the world economy at present. The debacle of unbelievable debt pileups for America’s leading banks and the crashing housing market still hasn’t reached the elusive end.

Obama’s $1 trillion Toxic Asset Purchase Plan suggests banks buy the loans that have gone bad or may go bad due to the fall in asset values. This serves as a great opportunity for large banks to clean up their balance sheets but proves to be a risky strategy for smaller, marginally solvent banks. A noble idea, Mr. President, but it might not work.

A Flawed Mission

While the concept is good, it suffers from various flaws. First is the problem of scale. Most economists believe that there are more than $1 trillion worth of assets that fall in the ‘toxic’ category. Secondly, the plan is only as good as the partnership between public banks and private investors. After receiving billions of dollars in stimulus funds, America’s leading banks are considering buying toxic assets sold by their rivals under the new plan. Without any meaningful reduction in the total amount, the toxic assets will just shift from one bank to another. Up to 85% of the value of toxic assets is being guaranteed by the government on a non-recourse basis.

Public Expectations

Even if banks jump to the insufficient bait, the plan does too little for the millions of people who have lost their jobs and haven’t got any stimulus check in the mail to pay the bills or the next loan installment. Sadly, it’s just another brick added to the pile resting on the taxpayer’s shoulders. In the meantime, middle class America continues to wait for a realistic, sustainable and respite-offering solution to their state of despair.

Instead of using taxpayer funds to deal with the irregularities of financial markets, the government needs to make constructive headway for creating more jobs and encouraging savings by U.S. households. As they come up with sophisticated cash advance plans to bail out A-list banks and multinational companies, the U.S. government is only depleting the already bleeding economy.

As of now, people can only hope to receive some part of the benefits promised by the Toxic Assets Purchase Plan, a fund too small to fill the gaping hole they have dug through decades of overspending and make-belief boom.