Einstein 1, Geithner 0.

“You can never solve a problem on the level on which it was created.”
Albert Einstein

Secretary Geithner admits that two of the major reasons for our financial failures are excessive leveraging and excessive risk taking, especially risk taking that caused tax payers to take the risks.  He now proposes to create a market for very risky “toxic assets.”  His solution:  permit buyers to heavily leverage themselves.  Buyers put up only 15% of the purchase price (possibly with some of the 15%  being borrowed from the private sector) and borrow the rest from the government.   In order to prevent buyers from losing more than 100% of what they put up, the tax payers would take 100% of all losses beyond the first 15%.

I think of this policy as “Einstein 1, Geithner 0.” To paraphrase another Nobel Prize winner, the subtitle could be “Surely you’re joking, Mr. Geithner.”


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