Free Markets, Free People

The “Geithner Plan”, Front And Center – Will It Work?

The Geithner Plan for “Bad Bank Assets” has been published in the WSJ under Geithner’s name. It is pretty much that which was leaked and critiqued by Dale here.

James Joyner wonders:

To my non-economist mind, that sounds eerily remniscient of the Troubled Assets Relief Program (TARP), the $700 billion plan passed last October to prop up the frozen financial system by buying, well, troubled assets. Granting, arguendo, that the Bush administration, which ran the first part of TARP, was evil and incompetent and the Obama administration is all sweetness, light, and omniscience, why would this work any better the second time around?

Paul Krugman, as we noted last week, is not impressed by this plan at all:

This is more than disappointing. In fact, it fills me with a sense of despair.

After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Krugman goes on to discuss the economics of the situation and a relatively easy way to solve the banking problem. Probably one of the more striking lines in his discussion is:

But the Obama administration, like the Bush administration, apparently wants an easier way out.

This speaks to a theory we’ve all discussed about certain aspects of the job of president in which Barack Obama displays very little interest. From his chuckling though his “punch drunk” interview with Steve Frost yesterday on “60 Minutes” (an invitation to view him as unserious about the crisis) to his seeking an easy and fast solution to the banking crisis, it seems that this is one of those areas which holds little interest for him. He wants it dealt with as quickly as possible (or at least seemingly dealt with so it is at least off of the front pages) so he can move on to his real interest – his costly social agenda.

Anyway, read all of the Krugman critique.

Brad DeLong thinks Krugman may be wrong and lists 3 reasons why:

1. The half empty-half full factor: I see the Geithner Plan as a positive step from where we are. Paul seed it as an embarrassingly inadequate bandaid.

2. Politics: I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization the lower it’s chances become.

3. I think the private-sector players in financial markets right now are highly risk averse–hence assets are undervalued from the perspective of a society or a government that is less risk averse. Paul judges that assets have low values beceuse they are unlikely to pay out much cash.

While it is nice to be optimistic, it is also important to be realistic. Frankly I think DeLong’s optimism isn’t realistic in the face of this particular crisis and I’m inclined to believe the Krugman critique to be more “spot on”. I have no confidence that this plan will solve the problem.

One of the problems the administration faces which is above and beyond the “workability” of the plan itself is related to the AIG bonus blowup in Congress. Private investors are gunshy about participating – for good reason:

The backlash on Capitol Hill means private firms may think twice about taking part in Geithner’s public-private partnership, even though government financing will limit their risk and increase the potential of earning profits, said David Kotok, chairman and chief investment officer of Cumberland Advisors Inc., in Vineland, New Jersey.

“We expect that the participation in the program to be announced this coming week will be tepid at best” because of “fear that any action which puts them into the federal assistance plan will subject them to the chance of retroactive punishment and taxation,” Kotok said.

A real “chilling effect” given Congressional and adminstration overreaction to the bonus situation. Reports are Obama is cooling to the idea of retroactive taxation, but, right or wrong, there is still going to be a demand for some sort of action. We’ll see what sort of leadership Obama tries to exert concerning those bonuses if any.


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9 Responses to The “Geithner Plan”, Front And Center – Will It Work?

  • I’m sure if you’re a Republican strategist, you’re happy about this.  Personally, I think people need to put the political opportunism of this disaster of a President aside and consider what can be done in spite of the real winners in the Presidency and Congress. 

  • The reluctance of  private investors to invest in these ‘partnerships’ is probably a good thing. As to undervalued assets, it isn’t all undervaluation-The Bubble Has Burst, and it isn’t going to be reinflated.

  • Interestingly, the markets seem to be giving the plan a very positive reaction.   There is a weird idea going around that gets alluded to in the post here.  The idea that a President can’t have outside interests, joke around, or be doing a number of things while being President makes no sense (it’s as strange as the argument against Bush’s vacation time, or claims that Reagan was dumb and sleeping all the time).   I recall that Reagan made clear that on some issues it would be impossible for him to gather all the facts and make a personal analysis and determination.  A President who tries to do that will fail.  What a leader does is surround himself with people he trusts, works against groupthink by bringing in alternate opinions, and makes sure that the policies adhere to his basic principles.   Obama should not try to be the Treasury Secretary and engage at that level with the economic crisis, any more than a Commander in Chief should micro-manage and second guess what military leaders in a war suggest.

    • Scott – the President can have outside interests and a sense of humor.  Those are good things.  That is not the point here.  The point is, Obama doesn’t need to be on TV making basketball picks, on Leno making cracks about his bowling, or acting punch drunk on 60 minutes.  He has a job to do, and he’s had a piss poor showing so far.

      You’re whistling past the graveyard if you ignore someone like Krugman calling this a disappointing failure.  But hey, that’s you.

      • I don’t really agree much with Krugman on a lot of issues, you can trust his judgment if you want.

        Obama still has sky high numbers, and the White House is convinced he remains the strongest weapon the administration has.   So far, he’s doing better than most Presidents in their first 100 days, passing significant legislation and dealing with a crisis that is huge.  I know you guys will cherry pick little gaffes and the like and try to pretend he’s doing poorly.   Obama continues to remind me of Reagan, your criticisms of his actions are very much like early Democratic criticisms of  Reagan.  And his numbers probably won’t stay in the 60s.  Reagan was down to 41% approval by the end of his second year.  I bet Obama doesn’t dip that low.

  • Have any of these economic wizards realized that there is a lag time before any of their efforts will have a noticeable effect? Adults, even politicians, should realize that instant gratification is not possible.

     There is an old adage, ‘When in danger ,when in doubt, run in circles, scream and shout’. This seems made to order for politicians, and if only they would limit their activities to that we would undoubtedly be better off. Instead, we get the screaming and shouting plus panic stricken meddling in areas they are obviously unqualifed to enter.

  • The problem that the government is doing nothing to relieve is that government backed securities are high risk now.  The government has shown that it will seize any return on these investments as profiteering.  There is no upside to investing in these assets.

    The biggest toxin in these assets is now Congress.  The quickest antidote would be to get Congress out of the market.

  • I like this from the James Joyner link:
    [I]t’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities.

    It reminds me of Freddie and Fannie and we all know how well that worked out.

  • The markets love it because tax money will be given to financial companies. This does not mean its good for the country. 

    Personally, I hope the plan works, and perhaps we’d best not wait for them to come up with plan B, as it takes 6 months apparently.