THE PLANK FEBRUARY 16, 2009
In the last few days, two prominent financial columnists have suggested the reaction to Tim Geithner's speech last Tuesday was unfair. The Times Gretchen Morgenson says President Obama put Geithner in an impossible position with his persistent expectation-raising. Jim Cramer writes that the Geithner plan is fundamentally sound--it resists the temptation of nationalization, which would be a fiasco in practice, and has the potential to remedy the situation at a fraction the cost of the alternatives, like a "bad bank."
I still have mixed feelings about the substance of the Geithner 's plan--there are parts I think are very sound, I'm not sure how other parts would work in practice. But I think the speech was pretty much the best one could hope for under the circumstances. As a number of people who follow this stuff have told me, there was simply no way Geithner could have been ready to flesh out the details of the plan by last Tuesday--or, for that matter, this Tuesday or next Tuesday. He's got hundreds of incredibly complicated decisions to make, but, on the other hand, is still massively understaffed. To this day, he's got no deputy secretary and no under secretaries (though there are candidates waiting in the wings and pending Senate confirmation), to say nothing of their staffs and subordinates. Under the best circumstances, it's likely to take Treasury another month or six weeks to work through this stuff.
Since last Tuesday, we've heard over and over how markets hate uncertainty, which drove the negative reaction to Geithner's vagueness. But imagine the uncertainty that would have built up over the next six weeks had Treasury simply asked the markets to sit tight? Every few days would have brought another rumor about how nationalization is imminent, or a bad bank is imminent, which would have produced wilder swings over a much longer period of time. Geithner would have eventually been forced to say something before the plan was ready anyway. Only then the reaction--and the sense of disappointment--would have been far worse.
If you have to give a speech that lays out principles but is light on details, far better to do it on your own terms than to have your hand forced by a deteriorating situation.
Update: Today's Washington Post plays a bit unfair by introducing some reporting into the mix. According to the Post, the biggest reason for the lack of detail in Geithner's speech was his decision to change course several days beforehand: The original plan was to either have the government buy up toxic assets from the banks (a so-called "bad bank") or to have the government insure the assets for the banks (or some combination of the two), but this was junked for fear the price tag would be prohibitive (politically if not financially), and that pricing the assets would be a problem. So, again according to the Post, Geithner shifted to the current idea--a public-private partnership for buying up the assets, which his former colleagues at the Fed had explored several months earlier--but didn't have time to figure out the details.
For what it's worth, the rest of the process went about like I suspected. That is, Geithner was hampered by a lack of manpower at Treasury, but he calculated (correctly, I think) that it was better to introduce a vague plan now than to offer specifics that might have to be changed later, or to say nothing for a long time and keep the markets guessing.
The obvious question is why did it take so long to junk the original plan. I'm trying to get to the bottom of it, among other things we still don't know....