Michael Spence on Geithner
Nobel Prize winner Michael Spence says the Geithner Plan is a good idea and that its critics are simply assuming that Treasury intends to implement it in an unsound and somewhat corrupt manner rather than talking about the right way to handle the program
Government therefore needs to confine the use and match the level of leverage to cases in which the value may be impaired but the uncertainty is low to moderate. If it permits the use of high leverage in high risk cases, it will end up funneling assets primarily into banks. The investors have to bid on the packages. With excessive downside insurance they would end up paying more than the packages are worth. [...]
The reason this is important and not just technical, is that stabilising the financial system is going to require a complex set of government and central bank initiatives undertaken with imperfect knowledge of consequences.
That challenge is going to be much harder with a competent and well-intentioned government (which we have) if our fellow citizens who are understandably confused and very angry, think the government is trying to bail out the financial sector and doing it in a surreptitious way.
The more I’ve followed the back-and-forth on this, the less actual disagreement about the facts I think I’m hearing. What the critics are saying is that Geithner’s plan couldn’t possibly recapitalize the banks in an adequate way unless it was implemented as a horrible giveaways. What the defenders are saying is that if you implement the plan the correct way, it will be a helpful step toward resolving the situation at a time when it’s difficult to imagine the congress appropriating the volume of extra funds necessary to full resolve the issue.
Ultimately, these two points aren’t in conflict with one another. They’re different interpretations of the situation that are based on different assumptions about the competence and good will of the people involved. If you assume that the key policymakers are smart people doing their best, then you’re going to line up with Spence. You’ll predict a degree of success from the Geithner Plan followed by the need for additional action. And you’ll be concerned that over-the-top criticism of Geithner and the Treasury Team is going to undermine the political support that will be needed for further action. But if you assume that the key policymakers are inept, or unduly under the sway of big finance, you’ll see that a sound implementation of the Geithner Plan wouldn’t generate the needed volume of money, so the plan “must” be for a large giveaway. But either way, I think there’s actually agreement about both the nature of the financial situation and the fact that the implementation details matter a great deal here.
41 Responses to “Michael Spence on Geithner”
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April 9th, 2009 at 8:46 am
Good post, but you’re missing a shade of gray:
They’re different interpretations of the situation that are based on different assumptions about the competence and good will of the people involved. If you assume that the key policymakers are smart people doing their best, then you’re going to line up with Spence.
It’s not just that they need to be “smart people”. Just about every investment banker in the country is a “smart person” in an absolute sense. The problem is it’s genuinely difficult for anyone to know in which cases “the value may be impaired but the uncertainty is low to moderate”. The whole crisis began because smart people doing their best thought the uncertainty around certain assets was low-to-moderate!
So we not only need competent, well-intentioned people implementing the plan; we also need them to get a bit lucky on their assumptions.
April 9th, 2009 at 9:02 am
полезные ссылки…
Nobel Prize winner Michael Spence says the Geithner Plan is a good idea and that its critics are simply assuming that Treasury intends to implement[...]…
April 9th, 2009 at 9:04 am
Yes, “the implementation details matter a great deal here.” Given the fact that AIG counterparties like Goldman Sachs (Sec. Geithners old firm) have apparently been paid in full instead of getting haircuts does not encourage me to believe that the implementation will work in the taxpayers favor.
I understand the arguments. I just don’t see much reason to believe that Treasury will not continue to permit “he use of high leverage in high risk cases” or that it not end up “end up funneling assets primarily into banks”.
Geithener seems intent on preserving the Wall Street institutions, rather than saving the Main Street economy. Too bad they haven’t noticed that without Main Street there won’t be a Wall Street. Or maybe they believe they can do without us.
April 9th, 2009 at 9:06 am
The biggest problem that I have is that allowing sellers of assets to also be purchasers is just idiotic. You need a firwall between those buying the assets and those selling them to prevent absolute theft. And from what I’ve heard so far, the team is showing precious little concern about this problem.
April 9th, 2009 at 9:10 am
zak822 – I don’t believe Geithner has ever worked for Goldman Sachs, he’s been in the public realm for most of his career.
April 9th, 2009 at 9:12 am
CNN
Yeah, I just see oodles of reasons not to assume the Treasury Dept. isn’t going to be in the tank for the banksters.
April 9th, 2009 at 9:16 am
I think it would be nice if more commentators, including some rather prominent commentators, at least noted explicitly that it would be possible for this plan to be implemented in a way that did not necessarily involve “horrible giveaways”.
The plan can’t work without giveaways unless the assets really are worth more than current market value.
If the at-risk banks don’t get more than current market value they are insolvent and the plan has not worked. (The whole point of the plan is to avoid bank insolvency because bond haircuts could depress the balance sheets of bondholding institutions and create an insolvency chain reaction.)
If the banks get more than real value (hold-to-maturity value) then they get a giveaway. (I would say a disguised giveaway, but commenters have been stripping away the disguise.)
The only thing that would let the plan off the horns of this dilemma is if the hold-to-maturity value really is higher than current market value, which nobody knows for sure and the evidence for it is weak at best.
April 9th, 2009 at 9:18 am
But, Spence is just assuming Summers and Geithner are well-intended. Summers and Geithner were enablers of this panic and apologists for its authors. They are cronies of Robert Rubin and moles for Goldman Sachs. They have supported financialization of the entire economy and protection of the “financial services industry” for their entire careers as soothsayers for and proteges of the plutocracy.
They have done their damnedest to prop up the entire culture of looting financial institutions by exploiting the Greenspan regime of Moral Hazard and the Gramm regime of de-regulation.
With Ben Bernanke, they are working not to prevent a Great Depression — having engineered something possibly worse — but to prevent a New Deal or anything else counter to the Ayn Rand ideology of vengeful nerds.
April 9th, 2009 at 9:20 am
This is right I think. Spence and others are saying don’t see this plan or any of them as transfers or wealth from the have nots to the haves but rather as a way to save the system.
Of course it’s going to hurt citizens as they have to give their money to the financial giants but they are going to be hurt anyway. In fact citizens will be hurt worse if they don’t give the money to them.
There is actually no guarantee that the PIPP plan will even get off the ground. The TALF which was supposed to be the lynchpin of Fed policy has been a total failure with almost no participation. The fears I and others have expressed about the big banks gaming the plan are now so well advertised they can’t possibly play. The TAF is shrinking too.
The Wells Fargo record earnings report just out is a political statement as much as anything which carries just as much political risk as opportunities for the banks. The so called earnings will be grabbed as proof the banks are just fine. So if, and it’s a big if, the Stress Test says otherwise the banks will have new ammunition. Of course the public will be saying WTF? The worst economic quarter in American history possibly and Wells made record earnings. After they took XX billion of taxpayer money? As millions of jobs go down the toilet.
April 9th, 2009 at 9:31 am
I disagree. It seems to me that bond raters were not doing their best. Other actors in the game may have been doing their best to make money, but mistimed the bubble-burst, but I have seen no explanation for why bond raters failed so miserably. The only explanations I’m left with are incompetence, disinterest and corruption.
April 9th, 2009 at 9:35 am
Re Matthew’s comment “But either way, I think there’s actually agreement about both the nature of the financial situation and the fact that the implementation details matter a great deal here.”
————
NO there is NOT.
1) There has been NO explanation of why we should be giving ANY taxpayer money to the financial industry.
2) As I noted 7 months ago, it would have been far better to have loaned the money to REAL businesses that had real prospects instead of to unproductive parasites that have bankrupted themselves playing a casino game.
3) That way you would have supported the REAL economy which feeds and clothes us — instead of a pack of two-faced bandits.
4) And the stuff about Congress not appropriating more money is bullshit.
Bernanke has done the same fucking thing with this bailout that was done with Freddie Mac and Fannie Mae — he’s issued TRILLIONS in unfunded Guarantees that WE are on the hook to make good if thing turn to shit.
5) That’s why the true amount of taxpayer money at risk in this fucking seance is closer to $10 Trillion , not the $1.8 Trillion appropriated by Congress.
April 9th, 2009 at 9:35 am
grass, at #7
Thanks for straightening me out on
Geithners employment.
April 9th, 2009 at 9:52 am
1) ALL the bullshit about the common citizens having to absorb the gambling debts of the rich –else our pensions will lose big — is deceitful bullshit. NO ONE is advertising the specific amount of debt that is being dumped on middle class income groups by this robbery.
2) There is one good thing about all this — let the fucking whores for the rich run up $20 Trillion on our credit card, let the fucking Superrich buy US Treasuries so they can sit on their ass for the rest of their life and clip coupons. All we have to do is have a Constitutional Convention in a few years and REPUDIATE every damm cent that the US Government has borrowed.
April 9th, 2009 at 9:59 am
and that its critics are simply assuming that Treasury intends to implement it in an unsound and somewhat corrupt manner rather than talking about the right way to handle the program
To be fair, this is probably just a knee-jerk assumption after eight years of the Bush regime, during which you could not only assume but actually count on as a mathematical certainty that the government would implement any program in an unsound and somewhat corrupt manner rather than talking about the right way to handle the program. People got used to thinking that way, but now that Democrats are in charge it’s time to recalibrate one’s expectations.
April 9th, 2009 at 10:01 am
Geithner started out at Kissinger Associates. Ground zero for institutionalizing wealth transfer from the public to the elites.
There is something rather noble about Geithner’s going into the public, well the Fed is semi public, sector and thus eschewing personal wealth. His new worth is easily 1000% less now than it would be if he had gone to Wall Street. In addition tens of millions of people know his face and hate him. Not just citizens either. Those who were with the firm he helped select as the losers, like Bear or Lehman have a contempt for him that is bottomless. He is in a no win situation and when it’s over will not have the one thing which provides real respect. Personal wealth.
April 9th, 2009 at 10:07 am
You will notice that Michael Spence didn’t actually REFUTE the critics of the Geithner Plan.
April 9th, 2009 at 10:09 am
Re rapier at 21: “He[Geithner] is in a no win situation and when it’s over will not have the one thing which provides real respect. Personal wealth.”
—————-
On the other hand, if ANYONE was ever in a position to demand a bribe, it is Geithner.
He only needs to murmur and the Five Big Bad Bankrupt Banks would deliver wheelbarrows of gold, drugs and nubile 16 year virgins to any offshore island of his choice.
April 9th, 2009 at 10:14 am
In terms of markets functioning according to fundamental principals, fairness, justice or any other of those high minded concepts PIPP is an affront. It’s a bastard like every other of the plans, facilities and payouts. You can’t square a circle. It’s a dirty business with some possible winners, financial elites and their corporations, and guaranteed losers, taxpayers.
The system such as it is might be saved to some degree but principals have nothing to do with it. PPIP is a necessary sham in a sense. Just giving the trillion to the major financial corporations no strings attached is not possible again, yet. So it’s the best they can do. It’s very very simple. Wealth will be transferred from taxpayers, one way through taxes or other ways like inflation or less government services down the line or less growth due to the further concentration of assets, and that’s that.
April 9th, 2009 at 10:40 am
I don’t think people appreciate the fact that unless the banks are to be nationalised, there is essentially no other way to save them except to give them billions in free money.
And that’s the way it is. The banks are short money for core capital because of deficits and shortfalls resulting from their exposure. The solution is to increase core capital by government injection. And the only way you can do that without nationalisation, and without further burdening the banks with debt, is to give them free money.
And I think that is a political reality one has to face. It may be unpleasant, but it is necessary. To simply say “to hell with the bankers” is not a responsible or a realistic solution; it is an abdication of responsibility.
April 9th, 2009 at 11:09 am
Re Myles at 25: “To simply say “to hell with the bankers” is not a responsible or a realistic solution; it is an abdication of responsibility.”
———-
Of our responsibility as citizens to hang the thieving motherfuckers?
April 9th, 2009 at 11:17 am
And I think that is a political reality one has to face. It may be unpleasant, but it is necessary. To simply say “to hell with the bankers” is not a responsible or a realistic solution; it is an abdication of responsibility.
Certain leftists – and many an anonymous commenter – don’t give a shit. They’d cut off their nose to spite their face. They get off on ranting.
I think it could go either way, depending on the level of toxicity and the wild card of psychology.
April 9th, 2009 at 11:21 am
In the United States government, corruption is more likely than ethical behaviour. Obama has behaved in a corrupt manner already, by only allowing a certain kind of pro-business, anti-worker economist to be on his economic team. He has surrounded himself with personally corrupt individuals who recieved kickbacks before they entered the administration.
The Obama puts forth a plan that has no chance of working. The people defending that plan just make shit up to justify that plan, saying things like forced selling at auctions are part of the plan when they are not. At that point, it becomes obvious this is a con. Those fake progressives (and you can’t be progressive and favor wealth redistribution upward) who defend this are the sam fake- progressives who backed the Iraq war and for the same reasons. Using the same ‘we’ll pretend the plan reall says this!’ formulations they used to justify the Iraq War.
American government no longer deserves the benefit of the doubt. They refuse to explain this to us. They refuse to listen to us. They are ignoring their auditors. They are lying to us. They are behaving corruptly. We are not simply assuming that corruption.
April 9th, 2009 at 11:44 am
The plan is just a polite cover for money laundering.
The assets underlying many of these securities will never pay-out at a level that would make them as valuable as they were a year or so ago.
The mispricing of these securties occured before the crash. The market is correctly pricing them now and they are worth much less than the banks can tolerate.
The bottom line is that many of these institutions are insolvent and the faster that we all get right with that concept, the faster we can begin to honestly adddress this crisis.
April 9th, 2009 at 11:51 am
Re Pedro at 27: “Certain leftists – and many an anonymous commenter – don’t give a shit. They’d cut off their nose to spite their face. They get off on ranting.”
—————
It’s amazing that Pedro, DTM, etc can be apologists for this looting of the US Treasury and yet not come up with one single reason WHY we should support it.
The whole bailout has been supported by NOTHING but a Professor Mysterio claim that “You must suffer this or bad things will happen”.
We have the same bullshit meme we had in 2002: “All of the SERIOUS people agree we need to invade Iraq”.
April 9th, 2009 at 11:58 am
Re Sharon at 29: “The plan is just a polite cover for money laundering. ”
——–
No quite. With money laundering , you put in $1 Million of dirty money and on the other side you get $1 Million of clean money minus service fees.
With this scheme, you put in $1 Million of tax dollars and on the other side you get a big steaming shitburger.
I wonder what happened to all that money that people put into the Five Big Bad Banks as insured deposits — what’s REALLY in all those checking accounts? And if it ain’t money then where did the money go?
April 9th, 2009 at 12:17 pm
@DTM
Nothing you write above in any of your posts is untrue. But for this plan not to, in the end, have been a huge giveaway, then a lot of [your] pretty problematic assumptions will have to turn out to have been true.
Impossible? No, but the only bettors willing to bet your way seem to require large amounts of government financial support before they’ll make that bet. Doesn’t inspire confidence.
April 9th, 2009 at 12:37 pm
Actually, if Sharon wants to see how money laundering works, she ought to look at how Bill Clinton managed to accumulate $100 Million a few years after signing the repeal of Glass-Steagall. Which kinda was the kickoff for this little soiree.
April 9th, 2009 at 12:41 pm
Re DTM at 34: “The reasons why we need a functioning banking system, and the reasons why your preferred alternative would be a much more expensive and risky approach to that end, have been explained to you in the past. The fact that you choose to ignore those explanations doesn’t mean they don’t exist.”
———-
Refresh my memory — I’m kinda slow today. How is investing in real businesses with real prospects for profit a worse investment than pumping $Trillions into bankrupt banks and hoping it will somehow trickle down to the real economy?
We could let the Five Big Banks die and still have a “functioning banking system”. There are plenty of A and B rated banks out there who didn’t step in shit with derivative contracts and who could manage injections of government capital.
Of course, those guys didn’t donate a shitload to Obama’s campaign but why should that matter?
April 9th, 2009 at 2:46 pm
It is always amusing to see people cut off their noses to spite their faces. Like the UAW did in December 2008, when it told Republican senators to go to hell, leaving it without (involuntary and unwilling) congressional cover for further bailouts.
Leftists, in general, are a naive and foolish bunch. Go ahead and tell the banking system to go to hell. What will rise up afresh and from-scratch in its place, au contraire to those expecting another New Deal-style stranglehold by populist, government of private business, is Capitalism 2.0, a la mode de 1890. We will end up with a more capitalistic and less social-democratic state than we have today.
The reasons for this are fundamentally structural; the New Deal signaled the evolution into a high industrial economy based on large supplies of skilled labour, whereas the next economy will be based on a far smaller, elite supply of creative and intellectual (design, engineering, cross-border management) labour.
So, if the banking system goes down and takes Capitalism 2009 with it, I can simply pop the champagne and wait for better times to arrive. Again, stupid leftists.
April 9th, 2009 at 4:05 pm
Leftists aren’t telling the banking system to go to hell. We are challenging all those free market advocates that hate government intervention right up until they need it. Hypocricy abounds.
We need a working banking system, yes. We don’t necessarily need AIG, et al.
And there are a lot of people competent to run basic banking operations. We can live without the exotic financial instruments and leverage abuses that have served the crash the current system. And there is certainly no need to retain those individuals whose actions brought this upon us.
Matts original point, that the proper implementation of the rescue is everthing is important. We have to ask, what have the current bunch, either in government or the Wall Street end of the financial services industry, done to give us confidence that they will do the right thing? Me, I don’t see much to inspire confidence.