The Timothy Geithner financial rescue plan has been released. I’ve been cruising around look for people who understand the financial sector for comments.
Consensus: Yeah, right.
The most optimistic analysis is Brad DeLong’s, here updated in a post titled “I Think Paul Krugman Is Wrong.” Professor DeLong admits he is uncomfortable disagreeing with Professor Krugman, however. Professor Krugman’s column today was written before all the details were released, but he is opposed to the parts of the plan released earlier. Economist’s View has a roundup of reactions from economists, most of them pessimistic.
No one on the blogophere, Left or Right, is happy about it. Of course, the Right wouldn’t like anything Obama does, meritorious or not, so there’s no point reading them. But the Left generally is in agreement with James K. Galbraith at Washington Monthly, who writes, “Geithner’s banking plan would prolong the state of denial.”
The big concern, expressed by many, is that when Geithner’s plan flops (as most predict it will) President Obama will have lost the political capital necessary to do what really needs to be done, which is nationalize the bleepers.
Matt Yglesias disagrees. The Geithner plan requires no political capital, since it doesn’t go through Congress. And as he points out in a following post, the disconnect and denial on Wall St is enormous, (also see JPMorgan’s plans for new corporate jets and a luxury hangar). They clearly don’t get it, and they can still pull a lot of strings in Congress and in the media.
I don’t think that Barack Obama (or Tim Geithner) can proceed with a nationalization plan before all other alternatives are exhausted. Paul Krugman’s economic analysis may be correct but his political sense seems wrong to me. I’m generally with Brad DeLong on this, and I hope that things aren’t as bad as they might be, but if this plan doesn’t work out I don’t think we are unable to act further to place these banks in receivership as necessary (and with more time to work out what to do with them once we’ve got them).
thank you, thank you, thank you, maha, for the Galbraith link. So why isn’t he heading the Obama economic team?
The Geithner plan reeks of that flawed thinking euphemistically called the supply-side economic theory which is no more than economic alchemy – and no you still can’t make gold out of tin.
thank you, thank you, thank you, maha, for the Galbraith link. So why isn’t he heading the Obama economic team?
The Geithner plan reeks of that flawed thinking euphemistically called the supply-side economic theory which is no more than economic alchemy – and no you still can’t make gold out of tin.
Should add good post! Looking forward to reading your next post!
I read something, somewhere, yesterday that suggested that the FDIC is allowed by law to nationalize and break up failed depository banks, but does not address investment banks or “insurance†companies (I can’t bring myself to call AIG a proper insurance company at this point). These hybrid institutions allowed by Graham-Leach-Bliley aren’t covered. So they might need specific legislation to nationalize them? If I understood what I was reading, mind you. I haven’t seen this information anywhere else, so take it with many grains of salt.
More Thank You’s here for the Galbraith article, Maha. If only we could get Obama to read it!
Because of what I saw coming, four years ago I started reading about the Great Depression. Though some of what Roosevelt did he did unwillingly, it got done (with some help from populist pressure – and the elite’s prissy fear of revolution).
My personal favorites were the WPA programs which employed people in the arts – as Galbraith suggests.
do i have any idea if this will work? of course not, but the plan is out, it’s now a fait accompli. Perhaps Krugman could turn his attention away from trying to talk down its potential success and try to influence the NEXT policy debate, since this one’s over, at least for the moment. There’s so much more to do, specifically on designing a new regulatory regime for the financial sector, so that natural human greed is not left unchecked to bring down the whole economy again.
If this plan fails, Krugman will have full “I told you so rights”, but this round he lost, time to get ready for the next one, whether it’s financial regs, health care, energy, whatever. What’s the point of continual carping at this point?
First, the Geithner plan is a single component of a set of economic intitiatives. It’s not the total & final economic answer; it’s designed to address a single aspect – toxic assets and the effect that’s having on credit. The method (as I get it) is to allow the banks to auction the toxic assets to investment companies who would sell them over time for more than they paid. If they can do so, they can make money – a LOT of money. If they can’t, they lose the billions that are their stake in the game.
There are aspects to this that I love (so did Wall Street – up 500 points). First I oppose paying face value for the toxic real estate – particularly since that’s face falue as of a year ago when real estate was 15 to 20% higher and many of these ‘assets’ were fraudulently inflated then. Who decides ‘market value’? A judge? The banks? A chair-warmer in a government office? No. In an auction, the MARKET will determine the fair market value. (The banks must hate this, but they can’t figure out how to say so.)
The taxpayer will get his money back – or the investment firm in charge of resale won’t make anything. I’m liberal, but I am cynical, too. If the governement created an agency to oversee the resale of millions of pieces of property – the process would be completed – never. The investemt firms who manage the liquidation of these properties will take ONLY as long as will maximize their profits. 5 years – 10 years – but it will be completed and my interest in getting the money back is married to the profit motive of the investment firms. And I have faith in their greed.
My guess is that the banks will try to not participate without admitting they won’t participate. Because THEY want the government to guarantee face value – 100%, which this proposal does not do. (Keep in mind that was the McCain proposal, and we have not seen the last of it, if the banks have any influence left.)