THE STASH DECEMBER 28, 2009
The Journal has a wide-ranging story today on the extent to which the government's role in the economy has grown. The gist of the piece is that the expansion has been significant, which is almost certainly true, at least in the short-term. (Much of the intervention will be unwound in the next few years, though some of it won't.)
Still, I'm not entirely sure this is the right question to ask. Given that the whole financial system came close to disintegrating last fall, and that the real economy nearly followed, anyone but a complete neanderthal would have expected a pretty significant government expansion. The question is whether government expanded more, less, or about as much as we would have expected. Coincidentally, the editors of our web site have re-posted the piece Frank Foer and I wrote on this subject back in May, which argues that the expansion of government under Obama isn't as significant as you might have predicted. Ditto for his ambitions going forward. We now have about eight months' more data to work with, but I think the argument still holds up reasonably well.
Relatedly, a subtext of the Journal piece is that the consequences of all the government expansion are more negative than positive at this point. Take, for example, this detail:
Bank of America Corp. also has repaid its aid, freeing itself from the condition lenders hate most about the bailouts: Treasury oversight of executive pay. Even so, it sought the Treasury's advice on a pay package before hiring a new chief executive.
The bank was considering paying $35 million to $40 million to hire Robert Kelly, CEO of Bank of New York Mellon Corp., much of it to buy out his unvested shares and options. The Bank of America board wanted to know how that would go over in Washington. Treasury paymaster Kenneth Feinberg told the bank that if it were still under his purview, he would reject the package. Around the same time, President Obama publicly bashed "fat cat" bankers.
With those two signals, the talks with Mr. Kelly fizzled, according to officials involved with the decision. The bank instead promoted an insider, Brian Moynihan, who had been working to repair the bank's reputation in Washington. ... Mr. Moynihan, by contrast, told Obama aides in October that Bank of America wanted to work with the White House to achieve U.S. policy goals in areas like small-business lending and foreclosure prevention.
I think we can all agree that, in an ideal world, a board should be able to hire the best possible candidate for a job, regardless of his political skills. But, of course, we're pretty far away from that ideal. When it comes to the financial sector, one of the things that makes the world fall far short of the ideal is the government backing (both explicit and implicit) that makes it much, much cheaper for big banks to borrow money. As Dean Baker pointed out to the Journal:
Although smaller banks have long had a higher cost of funds than big ones, the gap has widened. The gap averaged 0.03 percentage point for the first seven years of the decade, but it jumped to a 0.66-point disadvantage for smaller banks in the four quarters ended Sept. 30, estimates Dean Baker of the Center for Economic and Policy Research, a liberal think tank. That suggests investors think the government would bail out big banks, but not small ones, if crisis erupted anew, he says.
The Journal holds this up as another reason to worry about government intervention, since it advantages big banks over small banks. And it clearly is. But, of course, this concern doesn't run in the same direction as the previous concern: It's not the big banks who have a problem with this; they're happy to borrow cheaply.
When executives at big banks complain about government intervention, what they're really saying is they want all the advantages of government intervention (cheap borrowing) without any of the disadvantages (like constraints on hiring decisions). But that makes no sense. Why on earth would the government provide the former without the latter? How could one even exist without the other?
I'd guess that if bank investors or board members or even executives were being honest, they'd probably admit that the cheap borrowing is worth much more to them than the cost of not being able to hire their ideal CEO. After all, the notion that the "ideal CEO" (i.e., pure financial brilliance, political skills be damned) is ever available to a major bank is kind of ridiculous. Even before the crisis, banks benefited heavily from the presence of, say, the Fed as a lender of last resort, and the (explicit and implicit) presence of the U.S. government of a backer of their obligations. The idea that this didn't require a CEO to have some savvy in dealing with the government is pretty ludicrous, even if the banks liked to pretend that all their profits came by dint of financial savvy. So I'm just not seeing how the current reality is so different from the paradise we've ostensibly lost.