THE STASH MARCH 9, 2009
It is, to massively understate the point, not exactly popular to defend Tim Geithner these days. And I certainly have concerns about what he's up to, and the direction the financial rescue is headed. But I think it's worth making at least one broad point on the guy's behalf. (God knows he could use it. When was the last time SNL not only parodied a Treasury secretary, but did it in a sketch that was funny?)
At the risk of sounding trite, I'd just say it's pretty easy for me and other commentators to insist that some form of nationalization is the only possible solution to the bank crisis. I happen to honestly think it is, as do many others. But it costs us nothing to say. We wouldn't have to deal with the logistical, political, and managerial nightmare of pulling it off, during which time thousands upon thousands of things could go wrong. And if some subset of those things did go wrong, we wouldn't be in charge of wading through the wreckage. If you were, your calculus would almost certainly be different from the guy who tosses off a few sentences and hits "publish" on his blog--sometimes before taking a shower in the morning. (That would be, uh, me.)
I couldn't help thinking this when I read Alan Blinder's column in Saturday's Times. Blinder ticked off some of the potential hitches with nationalization, including these:
First and foremost, the Swedish government had to deal with only a handful of banks; we have more than 8,300. Numbers matter, because deciding where to draw the nationalization line isn’t easy. Presumably, no one wants to nationalize all the banks, thousands of which are healthy. But where do you stop, once you start?
Suppose we nationalized four banks. Bank Five would then find itself at a severe disadvantage in competing for funds with the government-backed quartet. Forced to pay higher interest rates to attract depositors and other creditors, its profitability would suffer. Soon, Bank Five might start looking like a candidate for nationalization, too — followed by Banks Six, Seven and so on. ...
As stock traders began to contemplate the nationalization of Banks Five, Six and Seven, their share prices would tank, and short-sellers might consign the companies to an early grave.
Now, I have some ideas about why these fears are overblown, and how you could defuse them. (Transparency on the bank's balance sheets would be a good place to start, so people knew which banks were bona fide nationalization candidates.) But, if you're the guy who has to make the call--and deal with the s**tstorm that erupts if those fears turn out to be right, are you really going to take the word of a handful of bloggers and columnists? Even the top academic economists in the world? Paul Krugman has some great points in response to Blinder. But, if I'm Geithner, and I'm staring at such enormous downside risks, even an outsider as sharp as Krugman isn't going to set my mind at ease.
Don't get me wrong. At some point Geithner's going to have to do something truly comprehensive. And if he doesn't, or that something fails, he will rightly be blamed. And the longer he puts it off, the more likely failure becomes (all things being equal).
Also, as I've said before, I'm really glad people like Krugman are out there keeping the administration honest in the meantime.
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.