Treasury Moves Ahead with Protectionist Plan to Subsidize Banks

That could have been the headline of the USA Today article on the start of Treasury Department's Public Private Investment Plan to buy up bad assets from banks. Under the plan, the government will take most of the downside risk if the investment goes bad, with private investors getting half the profit if the investment turns out well. This arrangement would be expected to raise the price of assets above the market price. The article wrongly asserts that: "The government hopes that the public-private partnership funds can establish a price for the securities, sparking sales." The price generated from sales in which the government provides a subsidy would not be a market price. The Treasury presumably knows this. It will be a subsidized price. Presumably it is the Treasury's intention to subsidize the banks by purchasing their bad assets at an inflated price. It is also important to note that only investment firms based in the U.S. are allowed to take part in this program. While the media usually get hysterical over any hint of protectionism when it involves manufacturing workers, they have opted to almost completely ignore this blatant protectionism for the financial sector. While it is probably true that our financial industry is less able to compete internationally than our manufacturing workers, that is not an excuse for ignoring the protectionism benefiting this sector.

--Dean Baker