So who would you suggest?
The Big Dither
Last month, in his big speech to Congress, President Obama argued for bold steps to
fix America's dysfunctional banks. "While the cost of action will be great," he
declared, "I can assure you that the cost of inaction will be far greater, for it
could result in an economy that sputters along for not months or years, but perhaps
a decade."
Paul Krugman
Many analysts agree. But among people I talk to there's a growing sense of
frustration, even panic, over Mr. Obama's failure to match his words with deeds.
The reality is that when it comes to dealing with the banks, the Obama
administration is dithering. Policy is stuck in a holding pattern.
Here's how the pattern works: first, administration officials, usually speaking off
the record, float a plan for rescuing the banks in the press. This trial balloon is
quickly shot down by informed commentators.
Then, a few weeks later, the administration floats a new plan. This plan is,
however, just a thinly disguised version of the previous plan, a fact quickly
realized by all concerned. And the cycle starts again.
Why do officials keep offering plans that nobody else finds credible? Because
somehow, top officials in the Obama administration and at the Federal Reserve have
convinced themselves that troubled assets, often referred to these days as "toxic
waste," are really worth much more than anyone is actually willing to pay for them
- and that if these assets were properly priced, all our troubles would go away.
Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a
distinction between the "basic inherent economic value" of troubled assets and the
"artificially depressed value" that those assets command right now. In recent
transactions, even AAA-rated mortgage-backed securities have sold for less than 40
cents on the dollar, but Mr. Geithner seems to think they're worth much, much more.
And the government's job, he declared, is to "provide the financing to help get
those markets working," pushing the price of toxic waste up to where it ought to
be.
What's more, officials seem to believe that getting toxic waste properly priced
would cure the ills of all our major financial institutions. Earlier this week, Ben
Bernanke, the Federal Reserve chairman, was asked about the problem of "zombies" -
financial institutions that are effectively bankrupt but are being kept alive by
government aid. "I don't know of any large zombie institutions in the U.S.
financial system," he declared, and went on to specifically deny that A.I.G. -
A.I.G.! - is a zombie.
This is the same A.I.G. that, unable to honor its promises to pay off other
financial institutions when bonds default, has already received $150 billion in aid
and just got a commitment for $30 billion more.
The truth is that the Bernanke-Geithner plan - the plan the administration keeps
floating, in slightly different versions - isn't going to fly.
Take the plan's latest incarnation: a proposal to make low-interest loans to
private investors willing to buy up troubled assets. This would certainly drive up
the price of toxic waste because it would offer a heads-you-win, tails-we-lose
proposition. As described, the plan would let investors profit if asset prices went
up but just walk away if prices fell substantially.
But would it be enough to make the banking system healthy? No.
Think of it this way: by using taxpayer funds to subsidize the prices of toxic
waste, the administration would shower benefits on everyone who made the mistake of
buying the stuff. Some of those benefits would trickle down to where they're
needed, shoring up the balance sheets of key financial institutions. But most of
the benefit would go to people who don't need or deserve to be rescued.
And this means that the government would have to lay out trillions of dollars to
bring the financial system back to health, which would, in turn, both ensure a
fierce public outcry and add to already serious concerns about the deficit. (Yes,
even strong advocates of fiscal stimulus like yours truly worry about red ink.)
Realistically, it's just not going to happen.
So why has this zombie idea - it keeps being killed, but it keeps coming back -
taken such a powerful grip? The answer, I fear, is that officials still aren't
willing to face the facts. They don't want to face up to the dire state of major
financial institutions because it's very hard to rescue an essentially insolvent
bank without, at least temporarily, taking it over. And temporary nationalization
is still, apparently, considered unthinkable.
But this refusal to face the facts means, in practice, an absence of action. And I
share the president's fears: inaction could result in an economy that sputters
along, not for months or years, but for a decade or more. |
