Brad DeLong’s Case for the Geithner Plan
What exactly it means to be “for” the Geithner Plan is, at this point, a bit hard to say since nobody seems to think it’s adequate to the problems we face, but among those who clearly think it’s desirable for the plan to go forward as one step among many, Brad DeLong has been the most convincing non-administration defender. Read this extended remix to get a clear since of what an optimistic take on the plan would be. And whether or not you find that convincing, I at least find this to be almost certainly right:
Q: But if even the Obama administration thinks this plan will accomplish only 3/4 of the job, why aren’t they doing more? Why not do the entire job?
A: Voinovich.
Q: Voinovich?
A: Republican Senator George Voinovich of Ohio is the sixtieth vote in the Senate–the one required to close off debate, avoid a filibuster and move to a vote on final passage of a bill. If the Obama administration wants to do anything that requires legislative action, it needs Voinovich and 59 other senators on board. The White House’s legislative tacticians appear to think that 60 senators are not on board–especially after last week’s AIG scandal. The Geithner Plan is something the administration can do on authority it already has. Doing more would require a congressional coalition that, at present, does not exist.
Another way of looking at it is that the administration has a real-but-limited ability to ask members to cast tough votes they don’t necessarily want to cast. Doing something they can do without an additional vote makes it more likely that they can ask congress to cast those tough votes on the budget and on health care rather than on bank bailouts.
40 Responses to “Brad DeLong’s Case for the Geithner Plan”
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March 27th, 2009 at 9:34 am
Al Franken
March 27th, 2009 at 9:52 am
Given that Roubini concludes that the Geithner plan is the least worst option for *solvent* institutions (post-stress test) but that nationalization is required and unavoidable for *insolvent* institutions (as revealed by stress test), the legislation is still required.
That’s why Roubini is calling for Congress to act quickly to pass legislation allowing the orderly government takeover of institutions which otherwise don’t fit existing legislation.
Excerpt only. More text and video interview available at the link.
If that’s not clear enough, there’s this from Roubini:
March 27th, 2009 at 10:16 am
Is it possible for the Geithner plan and nationalization to co-exist? People keep talking about nationalization while overlooking the fact that it still doesn’t get rid of toxic assets. People point to FDIC as an example to get rid of toxic assets but the agency doesn’t have experience dealing with behemoths like Citibank and such. So how can we get rid a large number of toxic assets in a short period of time? May be it can be used as a mechanism to get rid of these assets. Who knows.
March 27th, 2009 at 10:21 am
Why Wall Street loves Geithner and his bank bailout plan:
FROM: http://www.forbes.com/2009/03/25/geithner-mortgages-banks-intelligent-investing-bailout.html
Money quote:
“Now we have the plan: It’s similar to former Secretary Hank Paulson’s plan to buy toxic assets from bank balance sheets but with a twist–the Federal Deposit Insurance Co. and Federal Reserve will give private investors cheap leverage.
For private investors like PIMCO, this means they’ll be able to enhance potential returns with government leverage. It also means, since the government will be granting them non-recourse loans, that if these securities ultimately fall in value, the private investors are protected–they can hand the securities back to the government and walk away.”
March 27th, 2009 at 10:28 am
It is also a reflection of the fact that both Roubini and Delong support Geithner’s plan for stress-tested and proven solvent firms.
In Roubini’s case, however, he makes it very, very clear that this only applies to *solvent* institutions. I did not see this distinction being made by Delong. It could have been my misreading. But when I read Delong’s various comments, I did not feel that question had been addressed. He may not have been claiming that Geithner’s plan would address insolvent firms.
But whether it’s a topic strategically avoided or not, it seems to me a huge lacuna of discussion to not emphasize the question. Particularly when I don’t have a feel for what the burden split would be between solvent and insolvent firms.
Knowing the distinction has helped to make me feel a bit more optimistic about the administration (Geithner) plan, and I’m watching very closely to see what happens on the new legislation proposed to allow orderly government takeover of nonbank financial institutions.
March 27th, 2009 at 10:28 am
The FDIC has authority to take over commercial banks. Those are the institutions we need to service the real economy; the others such as brokers, investment banks, etc., can go bankrupt if necessary. The FDIC can import help if required.
Geithner’s plan is an attempt to retain a failed system. Finance has imploded and has to shrink because assets were inflated way beyond reality.
Geithner’s fantasyland approach was made clear when he said that naked CDSs should be legal.
March 27th, 2009 at 10:30 am
Roubini, as quoted above (and I don’t want to just keep repeating one person, but I have to given that only he’s being focused on this topic) not only sees them as coexisting but absolutely dependent upon and tied to each other. To him the Geithner plan is essential for solvent institutions and nationalization the only option for insolvent institutions.
Bernanke and Geithner must have something in mind in backing new legislation sent to Congress regarding the government takeover / administration of proven insolvent but non-bank institutions.
DTM suggests that Delong is perhaps allowing for this coexistence as well. I couldn’t say, but this seems likely.
March 27th, 2009 at 10:43 am
Krugman’s take on the future of finance:
http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=1
March 27th, 2009 at 10:44 am
DeLong is right, and his explanation is so simple I’m kinda shocked so few get it. All of the chattering economists (most of whom I love, Baker, Johnson, Krugman, etc.) just do not see it.
Certainly many progressive bloggers don’t see it either. You’d think they’d know politics by now. (I won’t mention the blogs…)
March 27th, 2009 at 10:54 am
Crab Nebula,
The whole nationalization debate has been lacking from a legal, political and economic standpoint.
March 27th, 2009 at 11:22 am
Since most of these troubled assets are held by banks, the FDIC has *already* effectively given them non-recourse loans–if the value of the troubled assets in the end doesn’t cover the value of bank deposits, the bank shareholders walk away and the FDIC ponies up. I don’t understand how moving these FDIC commitments out of the banks and into these Treasury-sponsored funds changes anything.
March 27th, 2009 at 11:29 am
the biggest problem the geithner plan has is that many advocates of receivership act as though it’s a simple matter to make it happen. as prof delong reminds us, it is not: we barely got a moderate stimulus through the senate, yet somehow taking $9T (the balance sheet level of the 4 largest banks) assets into receivership and committing to a minimum of hundreds of billions of dollars to recapitalize them is supposed to be a no-brainer?
March 27th, 2009 at 11:31 am
That is a funny form of “protection”: the private investors can “walk away” in this fashion after having lost 100% of the money they invested.
These are not mom-and-pop investing their entire life savings in just one thing. This can hedge with the rest of their portfolios. Just like casinos, they can convert statistical edges into guaranteed wins.
Come on, I’m sure you know this very well.
March 27th, 2009 at 11:37 am
That is a funny form of “protection”: the private investors can “walk away” in this fashion after having lost 100% of the money they invested.
BTW, its not even clear to me that the government will prevent investors from creating multiple separate portfolios with loans being non-recourse with respect to each portfolio. I’d assume they will but the point is that “lose no more than 100% of you money” CAN actually be pretty valuable.
March 27th, 2009 at 12:18 pm
Well, DeLong’s answer is ridiculous, because it only explains why Obama is doing what he is doing through Treasury and Fed machinations — it does not explain why he is doing X through Treasury and the Fed (i.e., pumping large dollars with virtually no conditions or oversight and bribing hedge funds to make bad investments) as opposed to Y (e.g., imposing strict transparency, accountability, and substantive conditions — up to and including changing management and the ability to rescind stupid and self-dealing contracts — on recipients of federal largesse or insisting on actually getting voting stock when buying stock and actually using it).
March 27th, 2009 at 12:40 pm
So…
Matt’s back to “choose your own adventure” policy. You’d really that after the war he’d know better,
For those of you too stupid to understand reality: IF you back this plan you back THIS plan. You don’t get to say “I support this plan, but there should be…” Because you clearly don’t care about the “…”. You’re backing this plan. Not your idea of what it should be.
March 27th, 2009 at 12:42 pm
Because it’s completely unacceptable to try and save the banks openly and make the Republicans vote against it giving free money to banks (like they would). We should sneak it thru to preserve the Repubs option to demogogue it.
March 27th, 2009 at 12:46 pm
Put it this way” Until somone nationalizes a bank, you’re all just hoping.
The rest of us live in the real world, where these same pieces of shit have bought us off with unfulfilled promises of future action on issue after issue. NAFTA would give us college expenses and job training, except that they never followed through on either. The bailout would came with promises that something would be done to help homeowners, but nothing was done and scumbag democrats in the senate turned it into an even worse bill. Why the fuck should anyone believe ANY of you when you say that this will lead to nationalization?
It looks to the rest of us like the government is just handing money to rich people and hoping it trickles down to rest of us. Reaganomics, plain and simple.
March 27th, 2009 at 12:52 pm
So I have to ask: IF you’re willing to light huge piles of money one fire to help rich people, why the fuck won’t you do something to help everyone else?
We can’t get loans. We can’t get jobs. We can’t keep our god damned houses, and the only fucking people worthless pieces of shit like Delong, Yglesias, and the rest are interested in are the people they went to Harvard with.
How about giving the rest of us a reason to believe you’re not corrupt? In normal times, the burden of proof would be on us to prove you are. These aren’t normal times.
March 27th, 2009 at 1:04 pm
Brad Delong’s point has been ably countered, I think, by Steve Waldman here. http://www.interfluidity.com/posts/1238023797.shtml I like this graf from the response:
“Under the Geithner plan, the government will extend its non-recourse option to investors without preventing them from “swinging for the fences” on risk in order to extract value from the option. On the contrary, the government is insisting its loans be used to purchase assets that have already proved themselves unsuitable for purchase by a regulated entity, by virtue of being volatile and difficult to price. It’s as if an insurance company that ordinarily refuses to cover homes in hurricane states suddenly offered policies only to purchasers looking to build homes on Gulf-coast barrier islands.”
March 27th, 2009 at 1:44 pm
Why the fuck should anyone believe ANY of you when you say that this will lead to nationalization?
Motto.
Call me when they get to one of the “one steps of many” that actually does some good, instead of shoveling money down the throats of greed-gluttons.
March 27th, 2009 at 1:59 pm
For my part, I just keep asking the question. I specifically don’t say that nationalization will be, um, led to. No matter how many people say it’s necessary, at the moment I would predict against the likelihood of even proven insolvent firms. Or at least I wouldn’t feel safe predicting such as a policy, though it may happen once or twice. Maybe, but however sensible I grok that it still seems too radical for the establishment.
March 27th, 2009 at 2:05 pm
“Why the fuck should anyone believe ANY of you when you say that this will lead to nationalization?”
Why the fuck should i pretend that nationalization can just happen if you snap your fingers.
Basically there are 2 questions:
A) what’s left to do when geithner’s plan uncovers insolvent banks?
and
B) how would nationalization proceed if that was the goal all along?
the answer to A is nationalization of insolvent banks, the answer to B is the way geithner’s currently proceeding.
No one is saying there is some stealth goal of nationalization, just that in order for nationalization to take place, you’d end up doing most of what geithner’s already fuckin doing. So no time is lost, no economic damage is done, yet people want to keep crying about the plan? The difference here is whether or not you think Geithner is operating in good faith. Period. If he is, then if nationalization is necessary the groundwork has already been laid.
March 27th, 2009 at 2:14 pm
Because it’s completely unacceptable to try and save the banks openly and make the Republicans vote against it giving free money to banks (like they would). We should sneak it thru to preserve the Repubs option to demagogue it.
This is off base, IMO. Pushing through a funded nationalization bill will indeed give the GOP plenty of fodder for demagoguery, and many Republicans will gladly (temporarily) wear their anti-Wall Street populist hats in order to tag “elitist” Democrats as BFFs of Goldman-Sachs and Citi. As it happens, the Geithner plan probably doesn’t give us enough money to complete banking recapitalization, so the White House will most likely eventually have to ask Congress for more money to finish the job. Only, because of the Geithner plan, that bill will hopefully “only” be, say, a $700 billion authorization instead of a two trillion one.
March 27th, 2009 at 2:29 pm
The good news, from my point of view, is that this interpretation is possible, even reasonable. I don’t see anything yet that screams to me that it is impossible, though I’m just not happy relaying on guesses at bureaucratic intent.
March 27th, 2009 at 11:32 pm
“Fire sale of the assets” (DTM @ 19)– isn’t that another word for selling at market price? “Market” here meaning what somebody’s actually willing to pay for it. That’s the missing element in this whole business, to me.
The crap out there has to be cleared. It’s what they used to call a liquidation in the 19th century, when this happened every 20 years. This plan seems to want to clear the crap at artificially high prices that are subsidized by taxpayers, with the hope that if the economy also picks up, the prices ultimately won’t be too far away from what securities based on performing loans would be. It’s trying to cheat time, in a way.
Problem is, that isn’t how markets really work. At least not the way I was taught about them. Markets happen at points in time.
I’m not saying the crap needs to be liquidated outright, because that would be a really brutal thing for human beings to live through. But I have to agree with the point that if we’re using taxpayer money to cheat the clock and bet on bridging the recessionary period, maybe it doesn’t have to be done in a way that makes it a priority to save institutions rather than save the paper. The paper is the bigger problem, and doesn’t the Fed propose in effect to monetize it in order to save it from liquidation?
You know, I just don’t want to see or hear any more BS about how wonderful unrestricted markets are. It’s just so wearying.
March 28th, 2009 at 12:32 am
Yes, the tactical battles are underway. Toxic asset schemes are sallied forth, plans for nationalizing a few key financial institutions are tenuously floated, re-regulation ideas begin to be fleshed out.
To arrive at the strategic prize, the desired end result, to crush the stranglehold high finance has on the world economy, and, by proxy, the US Government, will be a long and arduous road.
I think the administration, filled for the most part with men and women who have not sold out, is up to the task.
Strategy trumps tactics. Keep your eye on the prize.
March 28th, 2009 at 6:10 am
Yes, the tactical battles are underway. Toxic asset schemes are sallied forth, plans for nationalizing a few key financial institutions are tenuously floated, re-regulation ideas begin to be fleshed out.
To arrive at the strategic prize, the desired end result, to crush the stranglehold high finance has on the world economy, and, by proxy, the US Government, will be a long and arduous road.
I think the administration, filled for the most part with men and women who have not sold out, is up to the task.
Strategy trumps tactics. Keep your eye on the prize.
OH! You’re my new favorite blogger fyi
March 28th, 2009 at 10:11 pm
It’s hilarious that you’re all debating something with the potential to kill the Democratic party without every acknowledging this fact.
If Geithner is wrong, the Democrats won’t ever see power again in your lifetime. You argue as intellectuals, not as people who might actually have to win elections. This is why people hate intellectualism- it basically leaves them out of the loop altogether in favor of decisions made by a very narrow elite with very narrow self interests.
March 29th, 2009 at 12:54 am
The Democratic party will never die but a goodly portion of it could and has sold out. Essentially, cowered and trembling before the Masters of the Universe they morphed into the Partie de Republican Lite.
As for Geithner he is nothing more than a front-line combat Major who can be summarily dismissed by a wave of the Marshall’s baton. He has marching orders pertaining to his sector. That is all.
Yes, unfortunately, if the current Major’s sector collapses, the Marshall will likely be defeated and replaced. Lets hope the Marshall’s Major knows what he’s doing.
Intellectuals for the most part were once people of average intelligence. At a crucial juncture, usually in their late teens but sometimes much later, they make a life decision. They say to themselves, I will work tirelessly day and night for years and decades in the hopes of squeezing out a few extra watts of candlepower.
Many people, like me, come up short in quest. My candle is permanently set on flicker. But I keep trying.
People born of genius. Those are the people to be despised.
March 31st, 2009 at 12:43 am
That depends on how liquid the market in question might be. If a market is not very liquid, it may take considerable time before you can sell an asset for its fair market value.
“Fair market value” that depends on a liquid, fully-functioning market (with, I presume, equal knowledge) is an idealization, isn’t it? What I always thought distinguished the market as a pricing system from, say, “just price,” is that market pricing completely denies that objects have intrinsic value. Rather, their worth is what a buyer and a seller agree on.
In actual life, duress, stress, need, uneven knowledge, and unequal bargaining power happen all the time and affect the prices that get agreed on. That’s one big way fortunes get made, and it’s one good reason for market interferences like minimum wages. The idea of “fair market value” sounds to me like a back-door way of smuggling in intrinsic value by ignoring the things that happen in real life, the arbitraging of which is at the core of so much of our business lives.