Much ado is being made over the recent revelations surrounding the Obama rescue plan that was sort-of, not-really unveiled the other day by Timothy Geitner. Apparently there was a bit of floundering from on high:
According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.
They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn’t have enough time to work out many details or consult with others before the plan was supposed to be unveiled.
It’s important to note two things: first, the Obama administration is able to re-evaluate their bad ideas and change them and even apologize if necessary; and second, they have a tendency to get ahead of themselves–like unveiling a plan that they didn’t have completely formulated and were in the process of changing.
Clearly, this is another case of the Failed Obama Administration. I mean, seriously, the guy’s been President for almost a whole month and he still hasn’t fixed the economy, pulled us out of two wars, and lined the streets with gold?
My one criticism is that we’re seeing too many attempts at compromise, half-measures, and unlikely solutions. Krugman describes it as “worrisome insularity” and maybe it’s that, or maybe what we’re witnessing is a sneaky move toward nationalization of the banks. Maybe it’s a bit of both. Hell, we’re already seeing Sen. Graham put the “option on the table.”
“This idea of nationalizing banks is not comfortable,” said Sen. Lindsey Graham (R-SC). “But I think we’ve got so many toxic assets spread throughout the banking and financial community, throughout the world, that we’re going to have to do something that no one ever envisioned a year ago, no one likes. To me, banking and housing are the root cause of this problem. I’m very much afraid any program to salvage the banks is going to require the government… I would not take off the idea of nationalizing the banks.”
I hate to bring up Sweden so often (and no it’s not because I’m half-Swedish by descent either), but the same thing basically happened there in the nineties, and in the end the taxpayer came out on top, and the banks were stabilized.
Sweden placed its banks with troubled assets into a so-called bad bank, where they could be held and then sold over time when market and economic conditions improved. In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending.
No, this wouldn’t require the nationalization of all our banks. A few institutions, and many smaller ones, are actually doing pretty much okay despite everything. It’s the uncertainty of all these toxic assets that keeps things from stabilizing. No amount of uncharted bailout money will solve this. The “bad bank” system of nationalization will eventually turn over bank ownership to private entities, so there is no worry of “creeping socialism” or any of that nonsense. It’s a drastic, temporary fix that has a great deal better chance of success than most ideas I’ve heard so far.
Matthew Richardson and Nouriel Roubini writing at the Washington Post observe:
As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains.
They lay out a set of steps toward “receivership” – a kinder word for nationalization – which basically include a) determining which banks are insolvent; b) immediately nationalizing those banks (thus wiping out the shareholders…); c) separate good and bad assets; d) merge all bad assets into one enterprise (a sort of massive Bad Bank); and e) eventually figure out how to sell off those bad assets and regain some losses.
Among the many eventual benefits of this plan would be the chopping up of these many “too-big-to-fail” behemoths that are, in fact, simply too big, whether they fail or not. The free market “solution” of having Big Banks eat up Big Banks in order to save them has proved demonstrably false. Bank of America was doing fine until they absorbed Merrill Lynch. Now Bank of America is certainly too-big-to-fail, and yet far closer to the precipice.
There’s really no other way, and there’s really no reason to keep beating around the bush. As Richardson and Roubini intone, “we’re all Swedes now” or at least, hopefully we soon will be…
This is not a move toward socialism, though certainly it will be railed against as such. It’s easy to call it that. It’s a great opportunity for obstructionism on the part of the Republicans in Congress. It’s fodder for the Limbaughs and Hannitys of the world. But it’s also the right move regardless of ideology, and I hope Obama realizes that it is, and doesn’t let blatant partisanship from the Right convince him otherwise. The arguments against nationalization are false flags. In the end, it will lead to healthier capitalism, smaller financial institutions, and banks back under the control of private citizens.
Update: Michael Lind has a stern warning for the Obama Administration: Beware Republican Populist Wrath! While I think Lind is right on a few things, I think he misses the larger point, which is that we just had eight years of Bush and I doubt the electorate will move so quickly back to Republican leadership which is still held largely accountable for the current mess. Then, too, I think swift nationalization will be viewed, in the long run, favorably by populist strains…
I rarely pretend to be an economic expert but I really like the ‘Bad Bank’ idea. I would prefer though that the govt create a federalized bank that would purchase the toxic assets and then would have the patience to figure out how to sell them and make a profit.Report