Geithner's Market Rally Spells Taxpayer Ripoff -- Nothing for Us to Cheer About

Yes, it is true: If you offer a trillion dollars to Wall Street, it will perk up.

Treasury Secretary Timothy Geithner has supposedly gone from zero to hero because his scheme to have taxpayers back up another bailout of bad bankers -- by buying all those toxic assets -- caused the stock markets to spike on Monday.

"Markets Like Geithner's Plan," chirped the Atlantic Online, in a pretty typical headline at the close of the day.

From Wall Street's perspective: What's not to like? Hundreds of billions more in federal funds will be used to prop up what even Fox Business News describes as a: "Bad Bank Buying Binge."

The news would be laughable if it was not precisely accurate.

ABC News celebrated the run-up by declaring: "Dow Soars as Investors Back Bad Asset Plan."

Bad is good.

Toxic is healthy.

Geithner is a genius.

Or is he?

While the US financial media may be going on one more Jim Cramer bender, a more sober take comes from across the pond.

Dan Roberts, the former US business editor for the Financial Times who now oversees the well-regarded business sections of Britain's Guardian and Observer newspapers, notes that Geithner's approach is not new.

Britain did pretty much the same thing months ago.

It didn't work.

Indeed, months after a Geithner-style fix, Britain's headlines today read: "Deflation returns to UK after nearly fifty years (The Guardian), "UK unemployment jumps at fastest pace on record" (The Telegraph) and "(Bank of England policymaker) Blanchflower warns of 'horrible' things to come" (The Independent).

Here is the assessment of Geithner's scheme from the Guardian's Roberts:

Events in Britain often take their direction from America, but the prevailing Atlantic westerlies seem to have reversed - at least as far as the banking crisis is concerned. It is hardly anything to be proud of, but we were the first to opt for selective nationalisation; the first to have a big row over bonuses (battles at AIG have eerie parallels with Sir Fred Goodwin's pension), and now seem to be several weeks ahead of the US in tackling the legacy of bad loans. The toxic asset plan unveiled by the US treasury yesterday aims to achieve roughly the same as the British government's insurance of bad loans did for the Royal Bank of Scotland and Lloyds.

So how do the two schemes compare? They still like to think they do things bigger and better over there. Treasury secretary Timothy Geithner has temporarily distracted critics from his Paul Myners-style grilling over bonuses by bragging about how the toxic asset plan will cover up to $1tn of bad debt. He is also clinging to American-style optimism about free markets: the actual commitment of government funds is far lower than $1tn but Geithner hopes private investors will make up the difference.

Otherwise, both schemes work on the same general principle: that banks will start behaving normally again and drag the rest of the economy with them if only they can be protected from their past mistakes.

But these responses underestimate the scale of this crisis. It is telling that yesterday's plans cover not just "toxic credit securities" but also many ordinary bank loans made to parts of the US economy that were meant to be still functioning relatively normally. Similarly, the assets put forward by Lloyds in the UK insurance scheme include every buy-to-let mortgage issued by HBOS, not just the ones already in default. Judge the banks on their actions rather than their words, and you would conclude this crisis has some way to go.

Yet both governments assume banks are suffering from a crisis of confidence that can be cured simply by removing the uncertainty of "toxic" debt. What neither seems willing to acknowledge is the likelihood that much of their lending has gone for good; that this is not a liquidity crisis, but a solvency crisis.

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