Timothy Geithner’s/Obama’s bank rescue plan doesn’t give me a lot of confidence. Here’s why:
Paul Krugman has posted a few times in the past couple days about the bank rescue plan. He argues that the Geithner plan is treating this crisis in the wrong way. By propping up the prices of the “toxic waste” that is at the root of the financial problems, the plan assumes that these investments are basically sound, but the underlying value has just temporarily dived below a reasonable value. Krugman argues that this is a misunderstanding on the part of Treasury, since the problem here is the investments themselves: the result of a (largely poorly planned) construction binge the country can ill afford.
“if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls. Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.”
Essentially, Treasury is betting that this crisis is merely the result of a panic that has distorted an otherwise functional market system. But Krugman argues the market itself is the problem here; to enact the necessary fiscal policies requires that the decision makers recognize the depth and bredth of the systemic problems in our economy.
It’s a shame that Congress hasn’t provided any leadership on economic issues. It started to react a bit after public anger seemed ready to boil over after the A.I.G. bonuses became news. Many commentators have rightly argued that there are more serious problems with the financial industry than these bonuses and that $165 million is a drop in the bucket compared to the total cost of the bailouts. Indeed, Spitzer, speaking from his moral exile at Slate, reminds us to be careful to peak behind the curtain here: A.I.G. bailout money has been funneled to a bunch of other firms (including Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays and Goldman Sachs), who are getting paid back 100 cents on the dollar for their adventures with the (morally) bankrupt company. But the public outrage at the bonuses is real and justified. There are quite a few things to be mad about right now, and desite widespread real, material pain for much of the country, there hasn’t been much visible anger about this situation. Of course the country is still feeling good because of the election, but we need to look at the economic team Obama has surrounded himself with.
There is still a narrow set of voices represented at Treasury (certainly not helped by the fact that Geithner is still working virtually alone). The recovery plan is being designed by the best and the brightest, sure, but it is the best and the brightest from the team that created the systemic economic problems in the first place. Greenwald argues the extent to which Goldman Sachs and its alumni are both the designers and beneficiaries of the bailout packages thus far is representative of the extent of true “oligarchic decay” in the governing and management of our financial system. I think he’s correct when he says this justifies real public anger; the hypercomplex, two-tiered natures of contemporary financial apparatuses demand the vigorous public response our deading media has thoroughly subdued.
In Providence, I recently saw Les Énfants de Don Quichotte, an experience that really dramatized the difference between our political universe and France’s. The documentary followed organizers of a citizen’s movement fighting for a universal right to housing. Here, we see the Today show visiting Sacramento’s twenty-first century shanty town while thousands of area homes sit empty in foreclosure.
There should be some public anger here. The offensive A.I.G. bonus scandal has only been the most dramatically personal and was therefore able to catalyze a lot of vehemence. Instead of trying to repress this populist energy, I wish the fourth estate would articulate the true depth of the problem so there could be public consensus for bringing in new economic voices to initiate legitimate structural change.
And finally, the market response should not be used as the sole standard of economic health here. As we’ve learned from Jim Cramer, that’s a metric completely controlled by the people who both created and are now trying to fix this mess. In other words, the plan was designed for them, and it gives them trillions of dollars more to play with. I should hope that they’re happy.