(All references to apocalypse are tongue-in-cheek…I hope. Some of that gallows humor Obama loves so much.) The markets are momentarily happy about the long-awaited, fleshed-out announcement of the Geithner plan to rescue failing banks. Increasingly frustrated since the Treasury Secretary’s announcement of a plan Feb. 10 with precious little detail, this weekend’s revelations were enough to make investors more hopeful:
Geithner’s op-ed on the plan is itself another indication of the administration’s problematic priorities, wasting almost 500 words on touting stimulus bric-a-brac before even getting to the plan, but the New York Times offers a succinct explanation of the three-pronged, trillion-dollar gambit:
Whether the plan will actually work, allowing banks’ balance sheets to show improvement, is an open question among economists. The aim is to unstick seized-up markets by clearing out banks’ toxic assets, thereby allowing them to start lending again. The administration hopes to entice private investors to buy those assets with a combination of fire-sale prices and shared risk with American taxpayers, who would foot much of the bill. The administration is hoping a group of private investors, such as hedge funds, will be able to create market prices for assets for which there simply is no market right now. Christina Romer called it “using the expertise of the market by trying to set the price for these toxic assets.” Administration officials have emphasized that, when toxic assets, which they assume are “undervalued,” mature and the market recovers, taxpayers will reap the benefits of taking on these risks as money flows back into government coffers. But liberal economist Paul Krugman became an unexpected thorn in the administration’s side this week, as he argued that there’s a reason such investments are risky- because there’s a significant chance they won’t go up. His first shot came on Saturday when he called the Geithner plan and its underlying assumptions an “awful mess” – a critique Romer called “unfair” on the Sunday shows. Today, he’s been debating the new policy again, refuting the administration’s line that its financing does not constitute a subsidy, and fretting that the Obama administration is solving a problem of “misunderstood” assets when it needs to be dealing with the fact that the assets are actually bad.
I guess we can hope that Krugman’s dim assessment ends up with others he’s made in his self-proclaimed “not great” forecasting record, but the fact that he’s arguing against partisan interest lends credence. On the other side of the argument, Brad DeLong defends the plan with a useful Q&A:
But he also leaves open the possibility of a scenario I like to call “The Road:”
But regardless of whether one thinks the plan will work in the long term, it’s hard to escape the fact that the Obama administration may run into trouble getting this off the ground. After all, the plan requires working closely with the very private investors Congress and Obama have been using as populist whipping boys. Wall Street will wonder why it should get involved in business dealings with a government that feels free to gleefully abrogate private contracts and pass punitive tax policy when public sentiment requires it. Such feelings “dominated some discussions among representatives of the Managed Funds Association, the biggest hedge-fund lobbying group, during meetings in Washington this week.” Main Street will wonder why its tax dollars are once again going to the pin-striped devils of lower Manhattan, whom Obama has suddenly decided aren’t all bad after all. And, the burning question remains: Why the heck didn’t we do this first instead of a $787 billion package of long-term social program investments and two-lane bridge projects? If Obama had put this plan before his own policy aspirations, he wouldn’t be facing this daunting mixture of bailout fatigue and tricky populism while trying to do the most important thing his administration will have to do.
