Matt Yglesias

Does The Country Need a Bailout Scapegoat?

The Scapegoat by William Holman Hunt

Amid calls for Timothy Geithner’s resignation, Noam Scheiber makes the case on his behalf. I find it convincing, but Ezra Klein seems to be suggesting that Geithner should step down anyway:

Scheiber is right on the merits, I think, but the politics matter. Whether Geithner did his best against a bad hand, he created a public relations disaster by bailing out Wall Street and returning it to wild profitability without doing something, anything, to satiate the public’s desire for retribution against the guys who almost ruined the economy. The downside of not denying the public a piece of Wall Street’s scalp is that vulnerable members of Congress now have little chance but to demand Geithner’s.

And this isn’t just Geithner’s problem, incidentally. It’s true for the whole administration. The bailouts were necessary, but they were also understandably unpopular, and there’s been virtually nothing done to balance the scales. No windfall profits tax, or transaction tax. No breaking up big banks, or capping salaries across the board. Financial regulation has been sold as a constructive discussion with the banks rather than a punitive measure to prevent future wrongdoing. The absurd result is that Republicans are playing the populist card (while quietly blocking financial regulation) and frustrated congresspeople are turning on the administration, because the administration has kept them from turning on the banks.

I recall that early in the administration, Geithner seemed in many ways to be being set up for the fall. The Obama administration’s plan for revamping TARP was “Geithner’s plan” so as to try to distance the popular new president from the unpopular policy he was about to get behind.

It would be cruel, but looking ahead to a congressional fight on financial regulation you can see the case for dumping a guy who doesn’t particularly deserve to be dumped purely for the sake of having a clean start. Then some new guy, who’s basically similar but who’s face wasn’t all over the bailout, can lead the charge for regulatory reform with the administration taking the populist, anti-banker stance and the opposition taking the pro-banker stance and the waters unmuddied by fights about TARP or things done by the NY Fed back in 2008.

How Vindicated is Tim Geithner?

David Brooks has a good column today arguing that Timothy Geithner’s approach to the financial crisis has been vindicated and that actually one of the most roundly criticized aspects of the Obama administration’s approach has worked out well.

He makes strong points, but I would have tempered this a bit. Brooks writes that it “now seems clear that nationalization would have been an unnecessary mistake — potentially expensive and dangerously disruptive.” But he also notes:

In the next few months, Geithner will be confronted with a cross-cutting set of pressures. First, the need to reduce the deficits, which is uppermost on his mind. Second, the rising populism in Congress, which has to be battled sometimes and appeased sometimes by an administration that hopes to get things passed. Third, intense public cynicism about government, which means that every debate is washed in negativity.

Most important, there’s the jobs situation. If job growth returns, that will be a sign that the recovery is normal and Geithner and the administration can return to a more moderate path. If employment does not rebound or the economy double dips, that will be a sign of systemic problems. Geithner and his colleagues will probably adopt a much more activist posture and have to throw their lot in with the left.

I think these challenges underscore the fact that even though Geithner’s approach worked a lot better than his critics were inclined to say*, they also haven’t worked all that well. The unemployment rate is much better than people feared it would have been without a financial rescue, but it remains unacceptably high. And the problematic political situation seems to me to be largely a direct result of the government’s failure to capture a larger share of the financial upside associated with post-TARP large financial services firms. The way the Chrysler/GM bailouts were structured, if either firms becomes wildly successful in the future, the US taxpayer will get a very handsome payout. But the services rendered to Goldman Sachs and JP Morgan and the rest were not similarly oriented. The TARP money was “paid back” but the taxpayer hasn’t gotten anything resembling a fair share of the upside. This has created a situation in which it’s very difficult for the government to take further steps in really any direction.

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Kinds of Confidence

Ana Marie Cox Twitters:

Geithner on new toxic assets funds: “They’re managed by professionals who know how to do this for a living.” Uhm.

I think this highlights a really problem for the administration. They want to maintain and restore confidence. But we’re now looking at a bifurcation of attitudes. Wall Street and other big business insiders take a different view of what sort of steps inspire confidence than do most people. To most people, as per Cox’s Tweet, the Wall Street whiz kids are, themselves, jokes and what would restore confidence is some kind of sense that they’ve had their assess kicked and some new people are brought in the run the show. But to the insiders, it’s just the reverse—they want themselves and their pals to continue to control the commanding heights of the economy.

Ideally, you’d want to play to both audiences simultaneously, but I don’t really see any way to do that. Consequently, the administration has pretty consistently chosen to play to the audience of insiders. And they’ve done it pretty well. You can see that stocks are up on this announcements, just as they were on Geithner’s nomination, and on most other days on which significant anti-crisis measures were announced. But on another level, Wall Street doesn’t manufacture cash out of thin air. The financial system depends on a broader set of non-financiers being willing to trust their earnings to financial institutions. And whether or not this plan shores up large banks’ balance sheets, nothing that keeps all the incumbents in place is going to do anything to reassure people about doing forward-looking business with these institutions.

DeLong’s Geithner Plan FAQ

I meant to say in yesterday’s post on the leaking out details of the administration’s plan for the banking system, that one should actually separate the issues “is this a plan that stands a good chance of working” from “is this a plan that comports with my beliefs about cosmic and social justice.” Geithner’s plan, it seems to me, does a lot better at the first question than at the second. A nationalization plan, I believe, would do better at the second and at least as well at the first. But the first question is an important one, so it is worth emphasizing that there is reason to believe that this can work in terms of pushing the economy toward recovery.

To that end, I think Brad DeLong’s Geithner Plan FAQ is very helpful in terms of putting one’s mind to rest about the efficacy of these measures. He also recommends this article in The Wall Street Journal and this article in The Washington Post as offering more help in understanding what’s going on than was provided in yesterday’s New York Times piece. They got the story first, which has made their coverage the most influential thus far, but it’s not really the clearest most accurate account.

Still, the Geithner Plan, even if all goes well, will leave us with a situation in which essentially the same large firms with essentially the same management still dominate the economy, but now with a bunch of added moral hazard.

The Treasury Secretary in the Super-Speed News Cycle

It occurs to me to observe that I think a lot of the recent criticisms of the Obama administration have been based on a confusion of chronological sequence with priority. People observe that it’s unlikely that we’ll see recovery in the real world until we tackle the problem of undercapitalized large banks. Therefore, they want this to be the administration’s top priority. And then they wonder why we’re hearing all this stuff about education reform and stimulus and health care and cap & trade when Obama should be fixing the banks! But I think this misunderstands the significance of sequence. The “stress test” process that Tim Geithner’s outlined necessarily takes time to complete. Meanwhile, it doesn’t involve any congressional hearings. Meanwhile, progressive policy wonks, many of whom are now in the administration, have been working on these other issues for years. Many of them—cap & trade, the Make Work Pay credit, the education reform, health care expansion—were at the heart of a long and hard-fought presidential campaign. And so at this point those issues really don’t require much more work from the executive branch. But they do require lots of congressional hearings, CBO analysis, committee markups, etc. Under the circumstances, it’s not much of a “distraction” from anything to write the speeches, stage the public events, and officially get the congressional ball rolling on the rest of the agenda.

Then on the actual bank process. Is Treasury really being too slow? I don’t think so. I don’t think that we’re going to live in a world where in 2069 people are looking back at The Panic of 2008 and saying that the problem was that Barack Obama took office on January 20, but Treasury Secretary Timothy Geithner didn’t fully unveil his bank rescue program until April 11. If the program works, people will say that the administration worked with extraordinary speed did X, Y, Z, A, B, C, and unveiled a bank rescue program—all within its First 100 Days in office.

What people might say, looking back from the future, is that Treasury’s response was ineffective. That could happen. That would be bad. But that’s an argument for going (relatively) slowly and methodically, doing the stress tests in a convincing way, and making careful decisions.

A lot of Tim Geithner’s problem, it seems to me, is that the current pace of news and the conversation makes any period of anxiety and uncertainty feel intolerable to those of us who are participating in it. I already feel as if I’ve been writing about the aftermath of the Lehman/TARP fiasco since the dawn of team. In fact, it’s all pretty new. But it’s agonozing. We now have a whole bunch of 24-hour cable news channels, plus the verdant universe of blogs. But one of the key values of that media ecology is that you don’t need to worry too much about making mistakes or changing your mind. Instead of being methodical, you try to be honest and open-minded. You correct yourself when you realize you’ve made a mistake, you change your mind when new information comes to light or just when you think better of things in a calmer moment. It’s great. I, for one, love blogging. But the Treasury Secretary can’t act like that. Or, rather, I think Hank Paulson sort of did try to act like that in his final months in office and it was disastrous.

Saying we’ll just need to wait and see sounds lame, but at the end of the day I think it’s the right answer. We do need to wait and see. And meanwhile it’s appropriate for people to be talking and thinking and legislating on other matters of national importance.

Needed: More Bureaucrats

Alyssa Rosenberg makes an excellent point about the missing Treasury Department subcabinet officials:

It’s hard to argue that it’s in any way a good thing that Obama hasn’t filled a lot of key posts at Treasury. But that kind of misses the point. Obama shouldn’t have to appoint that many people in the first place. There are far too many positions that the president has to fill personally that could be easily and competently done by career employees. Of course the president needs people who can implement his agenda and set policy. That’s what department heads and a layer of political appointees immediately below him or her are for. But agencies and departments would be vastly better served by having high-ranking career employees bringing their institutional memory and experience to high-level positions in departments and ensuring that they can continue to function no matter how far along the president is in his vetting and appointments process.

Americans tend to assume that however we happen to do things is just the way things need to be done. But in reality, compared to other democracies we’re an extreme outlier in terms of how “deep” into the org charts of our agencies political appointees go. If you don’t like to think about foreigners, one way of thinking about how to build effective public sector institutions is always to look at the United States military where, unlike on the civilian side, political consensus has generally existed that effective institutions are important. You’ll see that while the president has discretion about which senior officers go where and do what, he doesn’t get to just pull new three- and four-star flag officers out of the ether (back in the day, things didn’t work that way, and during the Civil War there were plenty of “political generals” who did worse than the professionals). And what’s more, though a new president could shake things up right away, the expectation is that he won’t and that commanders will generally stay in place and provide continuity. They’ll report to a new commander-in-chief, and eventually they rotate to new assignments or into retirement, but the general assumption is that you don’t start everything from scratch. In addition to the various direct, practical benefits of greater professionalism this also greatly enhances the prestige of the low- and mid-level officers. The way you get to be an extremely important military commander is to start out as the most junior possible kind of commissioned officer and work your way up.

One potential model for civilian agencies might be the State Department where there are a ton of offices that are technically political appointments but where strong norms and traditions suggests that you fill them with career civil servants. Christopher Hill, for example, is a career foreign service officer. As such, he served on the team that negotiated the Dayton Accords. Based on that, he was given a “political” appointment as Ambassador to Macedonia. In 2000, he became Ambassador to Poland and he stayed in office until 2004 across a Presidential transition. Then he became Ambassador to South Korea, and in 2005 he became Assistant Secretary for East Asia. Soon, he’ll be Ambassador to Iraq. In general in the State Department it’s considered normal for the Undersecretary for Political Affairs and almost of all the Assistant Secretaries who report to him, and the policy-relevant ambassadorships to be occupied by career people.

Of course it’s worth saying that Timothy Geithner is essentially a person along this model—a guy who was working in a civil service job who, starting in 1995, got tapped for a series of increasingly-important political appointments in the Treasury Department who then left at the end of the Clinton administration. If the Bush administration had been inclined to make more Geithner-esque appointments at Treasury—elevating senior civil servants to subcabinet posts—it might have been more feasible to have a smooth transition.

Mission Impossible: Rescuing Banks Without Spending Money

Atrios writes that “this article makes clear Timmeh still doesn’t know how to find the pony in the shitpile.” And offers as a suggestion “Hint: you can’t.” I’m inclined to agree, but I think that what the article actually makes clear is that cost rather than ideological taboos is preventing the administration from undertaking a Swedish solution to the banking crisis:

Many financial experts estimate that the nation’s banks are holding as much as $2 trillion in troubled assets, most of it tied to mortgages. By contrast, the Treasury has less than $300 billion left in the financial rescue plan that Congress reluctantly approved last year.

To avoid asking Congress for more money, Mr. Geithner has been trying to stretch government money by working with private investors, the Federal Reserve and government-controlled companies like Fannie Mae and Freddie Mac, the mortgage giants. But that has introduced other tough policy issues, many of which remain unresolved.

“Their huge problem is that the American public is not willing to accept large losses for large financial institutions,” said Vincent Reinhart, a former Fed official and senior fellow at the American Enterprise Institute, a conservative research and lobbying organization. “Everything they are doing is about having the smallest possible footprint on the federal budget. They don’t want to engage the Congress and they don’t want to engage the American people in that discussion.”

Nationalizing banks would mean nationalizing the banks’ losses. That would cost a ton of money. Money that congress would need to authorize. If I were a member of congress, I would gladly vote to appropriate the funds. But would the actual members of congress? You can see where doubts might creep in. Indeed, where I giving the president advice on legislative matters I would say, at a minimum, that if it’s at all possible it would be better to just keep delaying on the bank issue until the 2009 appropriations bill and the 2010 budget have both passed, lest the price tag of the banking fix drag the rest of the administration’s agenda down with it.

Geithner’s Recipe for Zombie Banks

My Wonk Room colleague Pat Garofalo says almost everything that needs to be said about the latest twist in Tim Geithner’s bank thinking, but I thought I could add a picture of a zombie and a little bit of real talk. Geithner says:

GEITHNER: I think that’s the wrong strategy for the country, and I don’t think it’s a necessary strategy. What we need to do is to make sure that these institutions have the resources necessary to perform their critical function on an ongoing basis in our economy as a whole.

That bolded part is quite right. But “these institutions” need a lot of money. And giving them that money isn’t in opposition to nationalization. These are two great tastes that taste great together. If the banks are owned by the same people who own them now, and managed by the same people who manage them now, then it’s going to be extraordinarily difficult to persuade the congress and the public that we ought to make enormous transfers of funds from the taxpayers to those owners and managers. What’s more, the banks will continue to be managed by the same bad managers who got us into the current situation. As a result, we’re going to wind up giving the banks less money than they really need to take off. And they’ll continue to be managed poorly. So they’ll continue to be wards of the state. And no private investors are going to want to give smaller, healthier banks the capital they would need to expand and thrive. Consequently, our economy will continue to be dominated by large, semi-dead financial institutions that hamper growth.

By contrast, if the public takes ownership of the banks then you’re talking about transferring funds from the public to a publicly-owned entity. And the idea would be for the publicly-owned entity to be re-sold to the private sector. Under the circumstances, the case for making the transfer as big as necessary to create genuinely healthy banks—as opposed to the minimum needed to prevent a total catastrophe—becomes clearer. You also have the opportunity to throw out the top layer of management and especially the inept boards that created the situation.

Maybe Geithner Knows What He’s Doing

Pat Garofalo explains how the administration plan for a public-private partnership might actually work to clear up the financial system.

It’s also worth saying that “Geithner plan works” and “nationalize banks” aren’t genuinely exclusive possibilities. As Barack Obama was saying the other day, we have a lot of banks in this country. And among small banks already many have failed and been taken over by the FDIC, while others are okay and some are even prosperous. You could imagine Geithner’s plan achieving “price discovery” and it turning out that most of the big banks actually are solvent. Then those banks are in a position to raise private capital and go about their merry way. At the same time, price discovery could reveal that some of the big banks are genuinely underwater and need to be seized by regulatory authorities to prevent them from blowing up the economy. People’s policy ideas have tended to track disagreements about whether banks are suffering from a “liquidity crisis” (i.e., they have valuable assets but nobody will buy them) or a “solvency crisis” (i.e., their assets are actually worthless) but there’s no reason it couldn’t be some of both.

Krugman Wonders What Geithner Means

Like everyone else, Paul Krugman can’t quite tell what it is Timothy Geithner’s “plan” is supposed to be. But he agrees that there seems to be some chance that there’s backdoor nationalization in the scheme:

Stress test: everything depends on how this is actually implemented. What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that’s a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection.

So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place.

My read of the situation is that this isn’t an epistemic problem where we don’t know what the real plan is; rather the plan is just undefined. What was announced today leaves the door open to handling this the right way. Unfortunately, it also leaves the money open to the dread zombie bank scenario.

Nationalization After All

If I’m reading this correctly, Timothy Geithner’s financial rescue plan actually might lead to bank nationalizations after all. The key thing is provision 1b of fact sheet:

Capital Assistance Program: While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital. While most banks have strong capital positions, the Financial Stability Trust will provide a capital buffer that will: Operate as a form of “contingent equity” to ensure firms the capital strength to preserve or increase lending in a worse than expected economic downturn. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.

There’s clearly a desire here to avoid nationalization. A strong desire. But if the situation in the banking sector is as bad as the skeptics tend to think, this plan is going to end up with the government owning a substantial share in at least some large banks.

Geithner vs Axelrod

According to The New York Times the debate inside the administration turned into a controversy between economic policymakers and political operatives:

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

To start with the good news, this is the right way for a president to make a decision. The thing that matters most about the bank rescue plan is whether it works for the economy. It matters more than the short-term politics do for reasons of substance, but also for reasons of politics. People in 2010 and 2012 and 2016 will be looking for prosperity, not for gestures that felt good in February 2009. So on a matter like this, a smart president will listen more to his Treasury Secretary and his NEC Chair and his CEA Chair than he will to David Axelrod or Patrick Gaspard or anyone else on the politics side. The bad news is that precisely because this is the right way to make decisions, it seems that more progressive alternatives to Geithner’s plan will have never gotten a real hearing. The ideas that Axelrod was espousing in this controversy deserve to have a voice in administration deliberations. But that means a credible policy voice. There are plenty of well-credentialed economists in the world who I think would be more sympathetic to the Axelrod perspective. Axelrod just doesn’t happen to be one of those people.

David Sirota has observed previously and observes once again that there seem to be many more progressive voices on the political side of the administration than on the wonkier policy side. What the implications of that are would depend a lot on the character of the president. This president seems determined to listen to his policy aides on policy questions. Which is as it should be. But it means that the prevailing balance is very disadvantageous to progressives.

Geithner on Nationalization

I’m still waiting to hear a real argument from the Obama administration rather than this:

[Geithner] discouraged speculation that the plan would include the nationalization of some banks.

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” he said.

Well, look, as of 12 months ago we had a financial system run by private shareholders, managed by private institutions, and functioning without massive taxpayer subsidies. I think we all wanted to do our best to preserve that system. But, you know, it didn’t work out. And once you kick the “functioning without massive taxpayer subsidies” leg out of the stool, then it’s less clear to me why privatizing the profits makes sense. Or, rather, I understand perfectly well why it makes sense—it makes sense because the people getting the subsidies want it that way. But unless there’s a serious alternative to having the government offer the massive subsidy, it seems to me that it makes a lot more sense to own the upside and have a formal say over what’s done with the subsidy.

Scandal!

So it seems that when Tim Geithner worked at the IMF, his FICA taxes weren’t automatically withheld in the customary way, and consequently he underpaid taxes by tens of thousands of dollars and when the error was pointed out to him he . . . paid back taxes and penalties. What’s more, Chuck Grassley is “raising questions about a housekeeper who worked briefly for Treasury Secretary-nominee Timothy Geithner without proper immigration papers.” I, for one, know that whether or not Geithner once had a housekeeper whose work visa was valid at the time of hiring but expired during the time she was employed by him ought to be the primary focus of our attention as we think about filling key economic jobs amidst a huge crisis.