Monday, March 23, 2009

Geithner: man with a plan

I will cop to having no economic basis to judge whether Timothy Geithner's plan to create a market for today's "toxic" debt securities will work. But Salon's Andrew Leonard has the right take on how Geithner -- and by extension, Obama -- have handled the process of forging policy:
From the very beginning, when Paulson told us that the subprime meltdown would be contained, to the very end of his tenure, there was never the sense that the Bush administration had a coherent strategy of any kind.

The same cannot be said of the Obama administration. Geithner's plan may well not work, and it may be too beholden to Wall Street, but its rollout has not been an exercise in helter-skelter chaos. In dealing with the economic crisis as a whole, the Obama administration has put into play a steady flow of initiatives that should, in theory, all work together. In addition to the stimulus, the housing plan and credit relief for small businesses, there's also been a budget proposal addressing long-term issues that even Paul Krugman found impossible not to praise. The Fed has been doing its part by engaging in its own extraordinarily broad-scale stimulative monetary policy.

All along, it has been universally agreed that the most glaring weakness of the Obama portfolio has been the lack of detail on how Geithner intended to tackle the banking system. But there is a difference between a lack of detail and utterly contradictory confusion. If we can hold our breath long enough to calmly assess the last two months, one can see that amid all the noise, the Obama administration has been moving carefully forward in one direction.

Geithner was very careful not to pin himself down on details during his confirmation hearing, except to say that the goal of his eventual plan would be to encourage more lending than would otherwise happen without government intervention. His first speech was widely criticized because he neither endorsed bank nationalization or provided enough detail for Wall Street to chew on. But ever since that speech, he's done pretty much exactly what he said he would do. The banks are being stress tested to determine their ability to survive an even worse downturn than we are currently experiencing. Capital will be made available to them to weather that storm. A "public-private" venture to create a market for toxic assets has been laid out. We have timelines and we have a strategy. The scheme outlined in the Treasury Department's White Paper may share an intellectual heritage with Hank Paulson's original cockeyed dream -- except for a rather large difference. It exists. It is real. It will either work or it will not.

I suspect that when the history of this financial crisis is written, Obama and co. will be seen to have steered a rational course, shaped largely by a terrifying inside view of the risks of systemic failure -- and that their decision making process will be recognized as reality-based, adjusting to failures as they happen, embracing complexity, and unswayed by ferocious criticism on all sides.

Which is not to say that those who claim it's futile to try to find value in the toxic assets or prop megabanks that may prove to be insolvent are not right. Here, too, Leonard has perfect pitch:
There is every reason to believe it will not work, and may even make things worse. There is every reason to doubt the fundamental assumption being made by the Treasury -- that the "true" value of the toxic assets is higher than their current market value...

But all the sturm-und-drang expressed hither and yon about how the Obama administration is damning us all to a decade or more of economic doldrums by not pursuing immediate bank nationalization today, is just a bit overwrought. The U.S. economy is not going to stop shedding a half million jobs a month if we nationalize Citigroup today, instead of two months from now. We are deep in a recession and it will be quite awhile before we crawl out of it. Two months of caution do not mandate a "lost decade." Indeed, we will know in a matter of months whether the Obama administration's current efforts are gaining any traction, and if they aren't, then there will be no other alternatives. Perhaps the smartest thing that Geithner's critics could do is to just step aside and let him fail.
It's worth keeping in mind in this context that Nouriel Roubini, while forecasting/advocating the nationalization of a number of large banks, suggested that the time won't be ripe for approximately six months. I sometimes suspect that Obama, if not Geithner, suspects or knows that several of the largest banks can't be saved and is preparing the ground for the moment when nationalization emerges as "the worst possible option except for all the alternatives." If so, he would follow Roosevelt entering World War II and Lincoln issuing the Emancipation Proclamation - waiting for the moment when he can forge consensus around the inevitable.

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