The New Republic

"as I've said before, I'm really glad people like Krugman are out there keeping the administration honest in the meantime"

Um, Noam? That's YOUR job, too. Assuming, that is, that you're not just hedging your occupational/professional bets by trying to win the good graces of the Obama administration.

More critical distance and less cheerleading, please.

- teplukhin2you

March 9, 2009 at 12:50pm

For policy reasons I don't favor nationalization but I see the merits of the other point of view.  For political reasons, I think Obama would be committing sucide if he takes the initiative and nationalizes the banks.  And he is being suckered into nationalization, as two Republican Senators have supposedly given him cover but who would pile on in an instant as soon as the first bank is nationalized.  Right now the banking crisis is a Republican created crisis in the public's mind, but as soon as a Democrat nationalizes a bank it will become a Democratic crisis.  While I don't believe Obama's decision on nationalization would be primarily a political decision, it has to weigh in on that decision for it could have a profoundly negative effect on his agenda and on continuing counter-measures to the economic tailspin.  I'll go with Obama's judgment on this, and I believe so will most of the public.

- raylward

March 9, 2009 at 1:06pm

The "nationalize" or not debate is a total red herring.  Sooner or later, the Treasury is going to end up putting massive sums into the banking system to re-capitalize banks that are insolvent -- they have no equity.  When that happens, there is going to be no plausible argument for allowing the present owners, whose equity is wiped out, to somehow walk away with the value of the equity that the government injected, not to mention the billions just to bring the balance sheet to zero.  

The real issue is persuading the public that there is no alternative to using public funds to recapitalize the banks.  In that context, assuring the public that bank investors will NOT be receiving any government largess will be essential to gaining the necessary political support.  The public can accept the sheer necessity of preventing deposit defaults.  It will not accept rescuing bank investors.

So, let's just skip the whole non-sensical, largely irrelevant discussion about nationalization.  Although I think we should, as a matter or morality and efficiency, wipe out bank investors, the hole is so much bigger than their capital that we are going to have a massive expenditure either way.  The question of importance is when and how that hole is going to be filled.

- roidubouloi

March 9, 2009 at 2:17pm

I'd only caution against assuming the people at Treasury must be idiots if they can't see what looks obvious to you and me. It's just not so simple.

--Noam Scheiber

george:

To hear some accounts of the Treasury Department, Geithner is the only one in there. Whether this is good news or bad news however remains to be seen.

Perhaps it might help if we knew exactly how Geithner spends his day solving the crisis

Indeed, the FDIC allowed 60 Minutes to follow them into failed banks and watch how the process of a government takeover unfolded. It was quite reassuring to folks who had money in them

Similarly, Geitner should bring in a camera crew to follow his every move as he solves the financial meltdow. Even if we only see him staring out the window blankly for hours on end, we'll know he must be thinking deeply about "what to do".

george walton

- iambiguous

March 9, 2009 at 3:23pm

The public generally accepts whatever it is told about the financial crisis. After all, what real choice do they have given how only a tiny percentage of them have more than the vaguest clue about what the hell is going on.

This, unfortunately, allows any number of demagogues to sway them back and forth, up and down, left and right, over and out.

Think of the economy as a busted transmission. Think of the public as folks listening to a seasoned mechanic explaining what is wrong with the transmission and and why it will probably bankrupt them to fix it.

Who ya gonna call then, Tim Geithner? Not only did he help design the transmission, he helped facilitate Wall Street investment firms that put it in the family Truckster. Think of like this:

Clark Griswald [playing the role of the public]:

Ed, I'm not your average everyday fool. Now I want my blue sports wagon and if you can't get it I'm gonna take my business elsewhere! Where's my old car?

Ed, the car salesman [Timothy Geithner mollifying them]:

I'm just as upset as you are, believe me. Davenport! Get Mr. Griswald's car back and bring it back here! Now I can get you the wagon, there's not problem there. The problem is that it might take six weeks. Now, I owe it to myself to tell you that if you're taking the whole tribe cross-country, the Wagon Queen Family Truckster... You think you hate it now, wait 'til you drive it.

george:

But then again, we're not in Wally World anymore, are we?

george walton

- iambiguous

March 9, 2009 at 3:59pm

Back when I fixed windows for a living ('71-'81, roughly), I frequently encountered the strain of human beings we glaziers referred to as "sidewalk superintendents."

We'd be out setting a plate glass window--one hand taking the weight of the glass with a suction cup, the other high on the edge of the glass holding it vertical--while, across the street in most cases, two or more men would be standing, arms crossed across their chests, watching and commenting on our work.

They were likely retired or otherwise underemployed. Maybe heading down to the coffee shop to talk sports, or heading back from the barber shop. We would sometimes hear them, e.g., "They oughta use a better ladder" or "Be a lot easier if they took off the awning first" or whatever.

Two things were true about the sidewalk superintendents, regardless of which job we were on: (1) none of them had ever made their living as glaziers, and (2) if a sudden gust of wind came up, blowing the top of the plate glass against the brick facade so that it cracked and came down in the general direction of our exposed necks and arms in a cascade of guillotine-like shards, they were safely across the street.

Sound familiar?

- williamyard

March 9, 2009 at 4:52pm

Brilliant, yard.

- ratnerstar

March 9, 2009 at 5:58pm

we're all glaziers now, mr y

- teplukhin2you

March 9, 2009 at 6:35pm

yard:

Two things were true about the sidewalk superintendents, regardless of which job we were on: (1) none of them had ever made their living as glaziers, and (2) if a sudden gust of wind came up, blowing the top of the plate glass against the brick facade so that it cracked and came down in the general direction of our exposed necks and arms in a cascade of guillotine-like shards, they were safely across the street.

george:

Gee, I don't know about others in here but this sounds depressingly like, "let the experts on Wall Street and in the federal government" fix the economy. So far, though, the "guillotine-like shards" have been slicing through everyone BUT the experts.

george  

- iambiguous

March 9, 2009 at 7:48pm

An idea.

Sort of.

Why don't we have a new reality show on TV along the lines of American Idol. Only instead of singers, they audition folks off the street to fix the economy.

A panel of nonpartisan judges can hear the arguments, offer their own reactions and then Tim Geithner, Larry Summers and Barack Obama can vote them on or off the show one by one.

I can think of at least 4 or 5 folks in here who would be absolutely thrilled to audition. Plus they could throw in a plug or two for TNR.

george

- iambiguous

March 9, 2009 at 7:55pm

george,

I'd bet that, as we're typing this exchange, there are sidewalk superintendents standing around somewhere telling each other what's wrong with the economy and how to fix it. I wouldn't put anything past their imagined expertise: ending a recession, winning in Afghanistan, curing diabetes, crafting the perfect martini...you name it.

Doubt is my quiet friend, who has come to my aid more than once. Some day I hope to introduce him to those guys across the street with their arms folded.

- williamyard

March 9, 2009 at 8:36pm

Yea, fair enough Noam. But is that it? Is that the best defence for this, at best, incompetent procrastination? It's complicated; he's a lot on his mind; we can't understand the pressures.

That's pretty weak. Very weak actually. I might try with my boss, who I'm meeting this week. He'd tell me to cop onto myself and start living in the real world.

And why is Timothy taking the heat on this? Where is Summers and the rest of the economic advisory board?

- The Ignorant Populist

March 9, 2009 at 9:16pm

great stuff, williamyard.

- Noam Scheiber

March 9, 2009 at 10:41pm

william:

Doubt is my quiet friend, who has come to my aid more than once. Some day I hope to introduce him to those guys across the street with their arms folded.

George:

I wasn't defending the sidewalk superintendents above. I read you loud and clear.

And you're right in the bullseye. It's just that I think I am right in the bullseye too.

In other words, my own doubt [though friends insist it's cynicism], revolves around a pervasive sense of everything starting to spin out of control. The relationships that used to ground folks when I was a boy have long given way to an ephemeral and superficial world of pop culture, mindless consumption, celebrity worship and the ever superfluous and feckless pursuit of "lifestyles".

But I don't criticize this from a conservative point of view. In fact, I have basically lost track of why it both disconcerts and confounds me.

Yet the election of Barack Obama really surprised me. How could this possibly have happened if the way in which I understood the world made any sense at all? But then I just remind myself that those who embrace Obama are largely idealists. And nothing makes "more less sense" than that.

george walton

- iambiguous

March 9, 2009 at 10:47pm

"Right now the banking crisis is a Republican created crisis in the public's mind, but as soon as a Democrat nationalizes a bank it will become a Democratic crisis."

No, it is already O-G's crisis  for they are in charge now.  If the downward spiral continues as brutally, it won't be long before confidence in the O's administration starts to drop, along with his popularity.

- sabaka

March 10, 2009 at 3:13am

Sure, sabaka, just like Rossevelt's did.

I don't give the public a whole lot of credit, but it seems it understands very well that this crisis is due to eight years of unimaginable screw-ups and corruption by Bush and the Republicans, that Obama has inherited a righteous mess of catastrophic proportions, and that it won't be fixed quickly.

You're hopes for the political failure of the Obama administration may be disappointed.

- roidubouloi

March 10, 2009 at 7:31am

All the more reason for Obama to move swiftly to recapitalize the banking system, while it is clear in the public mind that no policy of Obama could have caused it.

- roidubouloi

March 10, 2009 at 7:33am

Doubt, indeed. I doubt Geithner's capacity to come up with an intelligent plan anytime soon.

There's hope, though. Maybe these WH advisors can help point Geithner in the right direction: http://tinyurl.com/create.php

- teplukhin2you

March 10, 2009 at 9:35am

I'll give even odds that by this time next year, Geithner's ensconced in a nice 8-figure position at Government Sachs.

Also 2-1 odds that Pa Spitzer and Junior have gone into business scooping up pre-foreclosure mortgages a la Penny Mac / Countrywide execs.

Not sure though whether NIC chair will go to Mycoskie, Ev or Ivanka.

- teplukhin2you

March 10, 2009 at 9:39am

http://tinyurl.com/azmdel

- teplukhin2you

March 10, 2009 at 9:41am

Mostly interesting. Still, the overwhelming sense that Geithner must be wrong is interesting. Why, after all, are so many sure of this? Can you handle this problem? Can I? There are, too be sure, a few commentators with sufficient credentials to have useful opinions, but--pace LBJ--have they ever run for anything? Maybe, just maybe, what Geithner wants to do is the worst possible solution except for all the others.

I suspect we all are suffering from W overload. For so long you could be completely sure that all decisions were being made by incompetents for purely political reasons that you simply assumed the worst. Possibly that time is past. And one thing's for sure--being able to juggle chainsaws the way Geithner is doing is way way above my pay grade. And yours.

- AlanK

March 10, 2009 at 10:35am

roi,  I'm not looking forward to O's "political failure" on the account of a long and severe recession, or worse. Quite the opposite, I'm hoping they'll quickly find a way to stop the economy's free-fall.  It's just that the signals from them so far don't inspire confidence that they even appreciate the urgency of the task. From your posts on the topic, I don't see that your own sentiment is much different.

If, however, the economy/stock market indices continue to fall while Geithner keeps dithering and Obama keeps talking about other grand things (UHC, etc),  I don't think the public will stick  with them for long (see Krugman).

- sabaka

March 10, 2009 at 11:20am

Get Pandit the Bandit to cook up some additional sunny forecasts for C. There, problem solved.

- teplukhin2you

March 10, 2009 at 12:19pm

My misunderstanding, sabaka.  Sorry for that.  Just with all the bad guys around trying to pin eight years of Bush and 28 years of Reagnism on Obama, I find myself a little tetchy.  

I don't hold Geithner particularly to blame for what does not yet appear to be happening.  He is only teh public face, and therefore the shorthand, for a group that includes Summers, Romer, Volcker, Bernanke, et alia.  Almost certainly not the most important voice among them.  That would be Summers.  

I have been all over the place trying to figure out what accounts for their behavior.  Today, my view is that they are simply terrified, over-awed by the magnitude of the problem and the radical nature of the solutions that will be required.  They are Lincoln's generals, too timid to fight the war they are charged with fighting, scared shitless that if they do something wrong the whole system will simply shatter and they won't know how to put it back together again.  We face a truly unprecedented emergency.  It will require unprecedented action in response.  But I fear that these guys are desperately trying to absorb this into something they are familiar with so that they can feel some confidence about what they are doing.  All they seem to be doing is freezing themselves in place which results in nibbling at the edges.

This public/private partnership thing is a good example of the nonsense that results.  You want something sold?  Auction it off.  You don't like the prices?  Then don't sell. But the solution these guys came up with for wanting to sell and not liking the prices is that they will just pay themselves the difference between what something fetches and what they want for it and consider that a successful sale.  WTF?  

I had initially thought Geithner would be a good choice as compared with Summers because we would have someone who, presumably, had a good working grasp of how financial markets actually function, rather than just another economist.  Now I do wonder whether Geithner was a good choice.  What we lack amongst the bunch of them, with the possible exception of Volcker but I wouldn't want to bet the ranch on it. is someone with the authority and knowledge to anticipate how markets will respond to various actions and to devise tactics that foreclose any unwanted market responses before they can occur.  I don't know that anyone exists with the necessary cred and cojones, so we have to make due with what we got.

The collective Geithner does face a very real political problem.  In order to gain the necessary political support for drastic measures, they have to explain to the public the magnitude of the problem and the necessity for solving it.  However, as Jeff Frey has pointed out, there cannot be any daylight between the explanation and the first steps of the solution lest the markets melt down in the interim.  Yet, the solution cannot be crafted and put in place without the necessary political support.  A serious chicken and egg problem.

I think the only solution is for the Feds to step up and guarantee all bank deposits and all inter-bank lending (and probably brokerage customer accounts too although this is far more complicated) so that it is possible to say things in public without market panic.  Then, they can address with the Congress the steps that are needed to return the system to private control and capitalization while allowing it still to function normally, or close to it.  People would still be able to put money in banks and take it out and transact their business.  Banks would still be able to lend, if necessary with pro forma capital supplied to them by government declaration -- "You have x amount of capital for lending purposes; and if you don't really, we will ultimately provide it.  So, go forth and lend."

The conspicuous absence of guarantees of derivatives, bonds, and equity holders capital will speak volumes.  These things will all take a market nosedive, which is actually a good thing so long as deposits and customer accounts are protected.  The market is far from perfect at valuing things, but the market value of this stuff, without the government any longer propping it up, would be the best indicator of what it is all really worth, and how much, if anything, the government ought to be prepared to pay for it or to allow those investors to receive in the course of a reorganization.  Why pay off in full a bond that is trading at 10 cents on the dollar?  Give the guy 11 cents to take a hike.  If the guy made a bad investment, that is, or should be, his problem, not ours.

In normal circumstances, one ought to be worried about chain reactions that might follow allowing some large debtors to default.  If the premise, however, is that the whole system is busted already, then it no longer matters.  It is like controlled demolition of a building.  You move out everything of value, shelter it, and then let the unusable structure fall.  You take control of the system and then let the bubble deflate.  If all the derivatives holders and financial firm investors poofed themselves out of existence by having their interests decline to or near zero, it just makes it that much easier and cheaper to clean up the rest -- the combination of good assets, that have real things of value underlying them, and customer liabilities.  We have no reason to mourn their losses.  They did this to the rest of us.

- roidubouloi

March 10, 2009 at 1:47pm

Roid, your comments about the inevitability of re-capitalizing inssolent banks are persuasive, but what about Blinder's contention that there will be a domino effect, ultimately pulling solvent banks under?

- dhurtado

March 11, 2009 at 3:56pm