Finance

Remember U.S. Treasury Secretary Timothy Geithner's plan to ease the credit crunch, the byzantine "Legacy Loans" program released to much hand-wringing this winter? It was, perhaps, the most ambitious, most confusing, most surprising governmental response to the Great Recession.

The idea was to help price and start a market for mortgage-backed assets on the banks' books. The government would assess and tranch the assets to sell at auctions to public-private investment partnerships; the government would eat the losses if the assets went sour.

Remember hearing about it recently? No?

That's because it's dead in the water, the New York Times reports.

The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.

In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay. 

The blogosphere's been all over sorting out what this means -- see Yves Smith and Ezra Klein, for examples.

Part of me thinks: goodness, isn't this the best of all worlds for everyone? The banks will be forced to mop up their own mess, and mark down the proper (low but existant) value of these assets at some point. (The i-banks' counterproductive and unethical desire to mismark and misprice concerns me a lot on this point, to be fair.) But if they want to wait for the assets to mature rather than moving them now, spreading their losses out over several years -- that's fine with me.

The government won't have to cajole hedge funds into participating, promising them some oversight concessions in return. That means hedge funds and the like can use their free capital, hopefully, on more productive investments. The government also won't have to subsidize the banks' losses on these assets, leaving those precious funds for other better purposes.

Plus, if the Geithner plan was always in part a confidence thing -- born of the perceived need to reassure banks that the government would not let them fail and would help ease the credit crunch -- this part of the plan seems to have worked. And without costing anything.

Here's looking forward to the other pieces, though.

Writing in The Nation, David Cay Johnston takes liberal interventionism to a new level with this modest proposal:

President Obama proposed on May 4 to crack down on offshore tax cheating; that proposal does not go nearly far enough. Instead of settling for a dime on the dollar, as Obama's plan would do, let's get serious about offshore tax cheating, both legalized and criminal. Let's do what we did to halt the imagined threats of communists in Grenada, depose a drug-dealing president in Panama and find those imaginary weapons of mass destruction in Iraq. Let's invade the Caymans!

The islands, which belong to Britain, have no military and just 300 or so police. An invasion force composed of tax lawyers, forensic auditors and a handful of computer technicians could execute a hostile takeover without firing a shot.

The Caymans are not really a country; they are a law firm posing as one. More than 12,000 "companies" operate out of a single building known as Ugland House, home to the law firm Maples & Calder.... There is $1.9 trillion in bank deposits in the Caymans--money actually invested in the United States and other countries but invisible to the IRS. 

I could certainly think of less pleasant places to invade. Though if we head down this path, the U.S. should probably start preparing for EU forces to make an amphibious assault on Delaware.

David Rogers/Getty Images

This is one weird commercial:

Yes, that's noted humanitarian and alleged former rock star Bob Geldof (along with physicist Stephen Hawking, feminist scholar Germaine Greer, and businessman Alan Sugar) trying to sell Britons on National Savings & Investments.  NS&I is a state-owned savings bank serves as a lender to the British government. It describes itself as a way to "raise cost effective financing for the government and to reduce the cost of government borrowing to the tax payer."

So after more than two decades of raising money for famine relief and pushing for debt cancellation in Africa, Geldof is now raising money for the exchequer to cover its debts. Not sure if that says more about Geldof or about the current state of the British economy, but either way, like I said, weird commercial.

Today, U.S. Treasury Secretary Timothy Geithner and President Barack Obama laid out a plan to create and enforce stricter tax regulations for U.S. corporations. Obama's opening salvo from the presser:

Most Americans meet their responsibilities because they understand that it's an obligation of citizenship...and yet, even as most American citizens and businesses meet these responsibilities, there are others who are shirking theirs. 

He went on to describe the U.S. tax code as "full of corporate loopholes that [make] it perfectly legal for companies to avoid paying their fair share."

That's right. He was talking about "tax havens": not just countries in which major U.S. corporations hide from U.S. taxes, but a big fat open season sign for fire and brimstone metaphors and sword of Damocles swinging. Democratic speechwriters must adore tax havens. They're like the Newt Gingrich of tax policy: always there to beat up.

Rhetorical fury aside, tax havens really do allow U.S. companies to shore up a whole lot of money, money which Obama hopes to use to revamp the U.S.'s healthcare system, among other things. Interesting factoids from the Treasury release: 

• In 2004, the most recent year for which data is available, U.S. multinational corporations paid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings -- an effective U.S. tax rate of about 2.3 percent
• A January 2009 GAO report found that of the 100 largest U.S. corporations, 83 have subsidiaries in tax havens.
• In the Cayman Islands, one address alone houses 18,857 corporations, very few of which have a physical presence in the islands.
• Nearly one-third of all foreign profits reported by U.S. corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands, and Ireland.

The closing of three major tax haven loopholes should garner $190 billion in tax revenue for the government in the next ten years. 

Another big beneficiary of the changes? Lobbyists. Corporate America isn't going to like this -- and they're going to pay a lot of money to see the repeal of these changes.  

The complete IMF World Economic Outlook, the most detailed and exhaustive examination of the global effects of the Great Recession, is out. It's long, it's complicated, and it's important, so I'm going to take some time reading it this morning, but at first blush:

• The IMF says the global economy will shrink 1.3 percent this year, and that recovery will be slow next year. "The outlook is exceptionally uncertain, with risks to the forecast still weighing to the
  downside," the report says.

• Unemployment's a lagging indicator, and the IMF doesn't expect unemployment to crest until the end of 2010. Bad news.

• The report gestures to the political problems engendered by the crisis. The world economy's a global one, and the IMF has been pushing for massive, coordinated, synchronized action to aid the worst-hit countries -- or, more specifically, the emerging economies with the least resources to ride the crisis out.