Fixing the Economy
| Thu Mar. 12, 2009 8:15 AM PDT
Megan McArdle is unhappy with how Obama is running the country:
Having defended Obama's candidacy largely on his economic team, I'm having serious buyer's remorse. Geithner, who is rapidly starting to look like the weakest link, is rattling around by himself in Treasury. Meanwhile, the administration is clearly prioritized a stimulus package that will not work without fixing the banks over, um, fixing the banking system.
Unlike most fiscal conservatives, I'm not mad at him for trying to increase the size of the government; that's, after all, what he got elected promising to do. But he also promised to be non-partisan and accountable, and the size and composition stimulus package looks like just one more attempt to ram through his ideological agenda without much scrutiny, with the heaviest focus on programs that will be especially hard to cut.
I picked this at random because it's representative of a groundswell of similar complaints. And I suppose I should be happy with this groundswell since I think it's pretty important that we fix the banks and fix the banking systems. Still, what exactly do people expect?
Did Obama prioritize the stimulus first? Of course he did. It's something that could be passed fairly quickly, and the faster it was passed the faster the money could work its way into the economy. Fixing the banks is just the opposite. Even the most optimistic observers don't think the banking system can be repaired any time soon.
There are two aspects to this. First, what should we do about weak individual banks? Second, how should the financial regulatory system be reformed? Neither of them is something that's amenable to a quick fix.
On the first, Geithner announced a plan a few weeks ago, and Wall Street immediately began whining about how vague it was. At the time, I sort of agreed, but since then I've begun to wonder just what people expected. That Geithner would walk up to the podium and announce he was seizing Citigroup? Some magical plan to turn toxic waste into gold? A trillion dollars to shower on the bankers of America?
But look: there's just no quick solution here. At least, not one that's practical. He can't take over banks without some pretty good justification, and the stress tests he announced are the minimum necessary for that justification. His plan to value toxic waste probably won't work, but that's because probably nothing would work. And while lots of free money for bankers would be popular with bankers, it ain't gonna happen.
So, yeah, in public he appears to be dithering. And the rock jawed titans of Wall Street are doing the same thing they always do when things aren't quite going their way: they weep and moan and panic. It's quite a spectacle. But honestly, this is something that's going to take months to address at a minimum. That's just the way it is. Going into a panic because we're well into his seventh week and Obama hasn't cured the economy is silly.
As for regulatory reform, well, I'd like to hear more about it too. But that's something that will be the work of years. And it won't have much immediate effect on the current financial crisis anyway.
So, yeah, Geithner could stand to be a little more reassuring in public, and it would be nice if he could fill empty Treasury positions a little faster, and I'm holding out hope that his stress tests will lead to some dramatic action by mid-Spring. But all legends to the contrary, FDR didn't fix the world in a hundred days, and the fact that the internet has made everybody even more impatient than usual doesn't mean Obama can fix it that fast either. I think it's time to chill a bit.
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Comments
Stress tests not required
Submitted by DCreader (not verified) on Thu Mar. 12, 2009 8:37 AM PDT.
Stress tests are _NOT_ required to take over Citi, BofA, or anyone else. The FDIC has taken over and resolved several banks a _week_ since this crisis has started and none of them got a stress test. When Citi came back for another bail-out Geithner could have simply said "no" and the FDIC could have seized them.
Banks aside, Geithner continues to shovel money into AIG as a means of bailing out all sorts of people who they won't even identify. Furthermore, the plans that he did unveil aren't just vague, what's worse is that the details he has made public _won't_work_ or will require a massive transfer of public money to investors and banks with taxpayers bearing all the risk.
People aren't upset because the internet has made us all unreasonably impatient. People are upset because Geithner has shown every indication of continuing the worst of the Paulson plan which fundamentally misdiagnosed the problem as illiquidity rather than insolvency. We have not gotten Change. We've gotten More of the Same.
Citi is quite large
Submitted by C. (not verified) on Thu Mar. 12, 2009 7:28 PM PDT.
I feel I should mention that on balance, my own opinion tends to be that nationalization would be far better than buying up toxic assets at par.
However, I feel you are being rather glib. Citi, BoA, Morgan Chase and Wells aren't just bigger than other banks. They are also quite different from other banks. For instance, they own brokerage houses which engage in trades for pure profit as well as money managers who trade on behalf of clients. A lot of the complex, hard to value assets are held by these subsidiaries, which operate quite differently and are subject to different regulations than typical savings and loan style banks which the FDIC is amply equipped to deal with.
The fact that these banks were allowed to grow in the way they were is a subject worthy of study --- and, it's becoming increasingly clear, censure --- but even so it's not clear that the FDIC could just step in and take them over, both from a legal and a practical standpoint. There's also other practical issues, like the foreign banks problem. Mexico, for instance, has a law saying other governments aren't allowed to own Mexican banks. If the US took over Citi we would own one of the largest banks in Mexico, a Citi subsidiary. I'm certainly not sure what the best way of fixing a dilemma like that would be ---- but I can't help but think it would either involve weeks of behind the scenes negotiations with the Mexican government or be a collossal cock-up. And that's just one of the obvious snags that's been widely reported --- I'm sure the situation isn't without hidden snags. Not to mention the mere staffing issues --- even after layoffs, citi employs somewhere in the range of 250,000 to 300,000 people. The FDIC had 5,000 in 2005, the most recent info I could find online. I'm sure they're hiring, and it's not like you have to replace every teller with a government employee, but that's a big discrepancy, you know?
Let me edit this post for you.
Submitted by DMonteith (not verified) on Thu Mar. 12, 2009 8:42 AM PDT.
"Megan McAdle...is silly."
There. Parsimony has advantages that the drive to create content can obscure!
Oh Megan, so predictable.
Submitted by Chris O. (not verified) on Thu Mar. 12, 2009 8:43 AM PDT.
Oh Megan, so predictable. She's been projecting these "buyer's remorse" posts since the election if not before. And then she went around LOOKING for ways to feel this remorse, even things that were based on complete rumors that were later proven false. Then I stopped reading her, cause I'm not going to put up with that preening nonsense.
Quite Right
Submitted by The Lounsbury (not verified) on Thu Mar. 12, 2009 8:43 AM PDT.
Although the filling of positions could be fixed by jettisoning the namby pamby Only Virgins policy the wooley headed clamoured for.
McGalt makes no sense
Submitted by PeakVT on Thu Mar. 12, 2009 8:50 AM PDT.
I'm not mad at him for trying to increase the size of the government; that's, after all, what he got elected promising to do. But he also promised to be non-partisan and accountable, and the size and composition stimulus package looks like just one more attempt to ram through his ideological agenda without much scrutiny, with the heaviest focus on programs that will be especially hard to cut.
Well, which is it? He got elected to pass his agenda, or not? And since the stimulus was just about the first thing passed, what's with the "just one more attempt" bit? Oh, and Obama did try to be bi-partisan on the issue, but the Republicans decided not to be good sports.
Apart from the bank solvency issue, Obama is moving with commendable alacrity. BUT (naturally) dithering over the solvency issue, which is separate from the regulatory reform issue, is a big problem. Yves wrote about dithering back in September.
I agree w/McAwful in part
Submitted by SocraticGadfly (not verified) on Thu Mar. 12, 2009 8:45 AM PDT.
That's on Geithner. Ultimately, the man is no more than Summers' sock puppet, part of the same insider banking circle that either directly caused or indirectly allowed this clusterfuck in the first place.
I knew that we were getting Pseudo-Change We're Being Brainwashed to Believe In as soon as his nomination was announced.
Joe Stiglitz? Would have been MUCH different.
I seem to remember a post of
Submitted by Brian J (not verified) on Thu Mar. 12, 2009 8:46 AM PDT.
I seem to remember a post of McArdle's from a few weeks after the election, where she was bemoaning the fact that so many of Obama's supporters and especially the public at large expected the economy to improve as soon as he was elected. She said she was amazed at this and couldn't remember a time when something like this was associated with another incoming president. I thought she had a very limited point, but that she was vastly overstating the case.
It's all about the banks
Submitted by g. powell on Thu Mar. 12, 2009 8:47 AM PDT.
I think McArdle's point is that without a functioning banking system the impact of stimulus spending is weakened because there is less of a multiplier effect. The money creation process is clearly broken, the Fed keeps shoveling liquidity into the system, the money supply is not responding. Therefore, you get a lot less bang for your buck with stimulus spending.
I wanted a much larger stimulus package the first time around, but I also assumed Obama would make a lot more progress on the financial front by now. I think a big, second stimulus is clearly necessary, but that has to be accompanied by something more than the "Paulson plus" plan that Geithner seems to be pushing.
Clearly, Obama has been handed a horrific situation and I think he has accomplished a hell of a lot. But unfortunately, it isn't good enough. That's not a knock on Obama, it's just reality.
What about the other party?
Submitted by AndrewBW on Thu Mar. 12, 2009 9:00 AM PDT.
McAwful (I like that) also leaves out the massive efforts by Republicans to block anything and everything that the president tries to do, from stalling appointments in Treasury to throwing every roadblock but the kitchen sink in front of the stimulus package to lying outrageously about his tax and budget proposals. I'm not complaining -- well, yes I am -- but I never expected the Republicans to do anything else since it's pretty much all they've got. But it's not as if Obama can sprinkle a little pixie dust on the economy and magically make everything all right.
Consider a longer view
Submitted by daCascadian (not verified) on Thu Mar. 12, 2009 9:10 AM PDT.
SocraticGadfly >"...That's on Geithner. Ultimately, the man is no more than Summers' sock puppet, part of the same insider banking circle that either directly caused or indirectly allowed this clusterfuck in the first place...."
I agree but I don't think Mr. Obama could have done anything else. One has to placate the power brokers that brung ya, at least when you are starting out. Should things continue as they are Mr. Obama could choose to clean house (ya'll ain't workin out so it is time make changes) and tell the power brokers that he tried their way and it didn't work so he is gonna do his own thing.
I agree that we all need to give Mr. Obama some elbow room to move around in. Find something else to whine about folks.
Speaking of people ("...insider banking circle...") that are part of the problem, sounds like Looneybury is off his meds again.
"...it's the end of the world as we know it and I feel fine..." - REM
Agreed, Cascadian
Submitted by SocraticGadfly (not verified) on Thu Mar. 12, 2009 9:27 AM PDT.
I knew that nine months and more ago, which is why I voted Green again (Green, not Nader) as I did in 2004. That said, since you're right and this IS Obama, he ain't gonna change. What we see is what we will get.
We need, instead, a new Huey Long, and one who will wear a bulletproof vest.
If the financial institution crisis turns out not to be so bad as feared, Obama may get lucky, like Reagan, and have it clear up in time for his re-election. If not, he'll get killed, and the GOP don't have a Huey Long in it.
Ahh, the two-party duopoly.
What about Congress holding up Treasury appointments?
Submitted by Crissa (not verified) on Thu Mar. 12, 2009 9:25 AM PDT.
This sounds to me more like bubbling up complaints which have nothing to do with the Administration. By this time in the first Bush admin, how many cabinet posts were empty? How many seats at the Treasury?
Obama can't tackle the banks because he has no linemen down at the Treasury, only what's left of the Bush admin. None of his appointees for there have gotten through congress yet due to Republican interference.
It's like whining at the clerk for not giving you ice cream when the power's out and it all melted before you got to the store.
Economic Recovery - how soon will it occur?
Submitted by MC (not verified) on Thu Mar. 12, 2009 9:31 AM PDT.
Dear Kevin,
I am a long-time reader and want to share a thought with you - yesterday there was news that some banks wanted to give back the TARP money because it would affect executive salaries, etc. This morning I logged into my homepage (Yahoo) and saw a news headline that caught my eye - GM says it does not need any money from the government in March.
Did someone just blink? Is the unstated Obama/G-man policy really a big game of chicken? This news, plus the last two days of stock market increases and Citi's inabillity to jerk the market back and forth earlier this week could mean that the banking/manufacturing/uber-capitalist sector of the economy is about to give in - do you think?
MC in San Rafael
FDIC & Bank Takeover
Submitted by The Lounsbury (not verified) on Thu Mar. 12, 2009 9:38 AM PDT.
Contra the ill-informed commentator supra, FDIC would not have been able to simply and easily take over Citi if the rescue had not occured. Citigroup is many orders of magnitude more complex than the banks FDIC has been taking over, which are largely smallish and entirely or almost entirely domestic banks.
Having some experience myself with utterly fucked banking systems - although entirely of the emerging markets variety (on the other hard the US is beginning to seem quite emerging marketish...) - I should rather think one needs to be a good dollop more realism on the time frame to fix your system. Even in simpler systems, two months of work is nothing. Now, I'm sure Geithner needs more bodies, and it is a bloody shame that prissiness over silly little tax errors and a naive ambition to have a bunch of bloody Snow Whites in your Treasury is holding that back, but you've got a big goddamned problem and a serious think rather than constantly reacting to market moves right off the bat is well advised.
stress test not needed
Submitted by DCreader (not verified) on Thu Mar. 12, 2009 11:00 AM PDT.
Legally, the FDIC could seize Citi any time it deems it insolvent. Citi is essentially admitting insolvency every time it comes and asks for government capital, so that's not really at issue.
Your assertion that the FDIC could not take over Citi hinges on practical issues of manpower and complexity. Yes, many people have made this claim. But Kevin was claiming that the stress tests were somehow necessary before Citi could be seized. It's not at all clear how these not-very-stressful stress tests would help to overcome the practical obstacles to taking over Citi. Furthermore, all of Geithner's talk about the TALF and whatnot shows no indication that he is making the preparations _necessary_ to take over Citi.
As Citi is an international bank
Submitted by The Lounsbury (not verified) on Thu Mar. 12, 2009 12:50 PM PDT.
with rather significant non-American operations - significant in senses of contribution to Citi cash flow in particular, there are rather non-trivial complications to your assertion.
Typical Americans, bloody navel gazers.
Geithner's Failure
Submitted by g. powell on Thu Mar. 12, 2009 10:13 AM PDT.
Obviously it is unreasonable to expect to see a financial system fix in just a few months, but at the very least there should be signs that the Obama would take a different approach than the previous adminsitration. But I don't seem them.
The stress test don't seem to apply enough stress. Geithner proposes a TARP-like plan that looks worse than the original -- it bails out institutions holding toxic assets AND the investors that buy them if they see losses. Agreed that a "super FDIC" is needed to take control of the mega institutions, but why isn't the groundwork being laid now?
I don't expect miracles, but I did expect better than this.
Kevin, Geithner is a tax
Submitted by Anonymous (not verified) on Thu Mar. 12, 2009 12:21 PM PDT.
Kevin,
Geithner is a tax cheat. He's a tax cheat, and one of the banker boys. He's a tax cheat, one of the banker boys, believes in crony capitalism, and is working to save his own.
We told you he was a fucker.
You gave him a blow job.
Evidently anyone with proper experience you'd bar...
Submitted by The Lounsbury (not verified) on Thu Mar. 12, 2009 1:39 PM PDT.
As Geithner has only been a US Treasury and Central Banker in his career. He's not, by training or work experience from the private sector.
But the Howling Know Nothing Populist Left would take the Bolshevik approach and kill all the Kulaks.
From "Pass the fucking bill"
Submitted by Gary Sugar (not verified) on Thu Mar. 12, 2009 12:53 PM PDT.
From "Pass the fucking bill" to "I think it's time to chill a bit".
Kevin really really really wants to believe that the plutocratic jerks whose greed and self-serving ideology caused the credit crisis are now going to fix the crisis.
stimulus helps banks.
Submitted by BigTom (not verified) on Thu Mar. 12, 2009 2:19 PM PDT.
An indirect way to help the banks is to help the economy which they have to swim in. I suspect that there are a lot of reasons to hesitate to simply take-down Citi and company. Plan B is probably to give them a little more rope, both in the form of cash, and in the form of time, and hope they can work their way out. It would probably require several good quarters, with the profits being diverted to paying off the losses on the toxic assets, but perhaps because of the ugly complications involved in nationalizing these big babies, that is seen as the lowest risk way out.
I'm getting cramps in my hands and feet, crossing my fingers and toe's, hoping that maybe, this week is the psychological turning point of the downturn. Of course things like employment, lag the psychology, but the stockmarket both reflects and creates the mood.
Very interesting how little awareness..
Submitted by Elie (not verified) on Thu Mar. 12, 2009 4:59 PM PDT.
0f what it takes to make big change.
Solving any problems requires an assessment of what is causing it. In this case, we have a number of financial and technical issues and then we have POLITICS.
Progressives and others are pretty good at determining the policy fixes and the technical issues, but I have been surprised at the real understanding around the politics beyond addressing that various interest groups exist and take usually x positions on things. Little appriciation however about the strategy of politics -- that is that on any big big policy like this with a lot of risk and potential for bringing the house down should have some real serious sophisticated political strategies.
In my opinion, risky decisions of this nature have multiple components of strategy and require immense amounts of information processing. Strategy and the "set up" is both active -- things Geithner and others do or say, as well as passive, letting things happen, looking for certain triggers to ocurr, behind the scenes activities and influences. (this of course I make way simplistic to what in fact they may be doing) The strategy is inacted, but the results may not be fully observable to the folks waiting for general announcements and explicit decisions -- much less for all the results to be manifest in x amount of time.
They are also accountable for using the resources in the existing system as much as possible. This administration was not the Russian army going into Berlin with all the old leadership blasted away. These folks are still here and are a factor in power and what can be achieved and how. Do you actually think that Obama or anyone is just going to put in place a brand new economic system and not have to use, manipulate these people and that may take shrewdness rather than ramming some x policy down their throats. Remember, the idea is to do this with minimum disruption - right? Or do some of you want the barricade thing?
Finally, there is a great deal of knowledge and information that many of us think we know, but do not. We are also not accountable for this. Whatever happens, succesfull or not, unlike the previous administration, no one can say that Geithners and ultimately Obama's skins (blood, hair and bones too) aren't all over this. They both know that.
We all have reason to be suspicious of Geithner's past history and actions. Be suspicious and I think its appropriate and fine to challenge and question -- but know that its a different thing to question than to know. Also, have a little honesty. Did you really think that Geithner (or anyone) could just walk up and fix this? Really? That someone else would have it all nailed down by now, or that YOU would know that there was indeed one clean fix? Ah, c'mon
Great post, Elie.
Submitted by SRW1 (not verified) on Thu Mar. 12, 2009 5:42 PM PDT.
Couldn't agree more.
Hold the horses
Submitted by SRW1 (not verified) on Thu Mar. 12, 2009 5:34 PM PDT.
OK, since the original topic of this thread has drifted a bit from McArdle's phony disappointment with Obama's economic priorities towards Geithners handling of the banks, especially Citigroup, I'd like to add my two cents to that.
On the one hand I also confess to the impulse of wanting to see Geithner act more decisively. On the other hand however, I am wondering whether all the bashing he is taking really is warranted.
Contrary to what The Lounsbury argued in his courteous comments, I sort of doubt that taking over Citigroup really would be that difficult an exercise once Obama/Geithner have made the decision to do so. To avoid any misunderstandings, I'm not saying that they could simply go ahead and do this any day they like. What I'm saying is that if and when Citigroup needs to go back to the government the next time to ask for more money, what should prevent Treasury to set up the injection of further funds in such a manner as to give it de facto control over the bank?
I very much doubt the current shareholder would be in a position to put up much resistance. What most likely is much more of a concern to Geithner is what to do with the bond holders, because there he will have to strike a difficult balance. Given how much money has already been sunk into the banks, it would seem politically inconceivable not to give the bond holders a haircut. But how much of it? What is the interdependence between a bank like Citigroup and other financial institutions, i.e. how big of a knock-on effect is there likely to be? How much of a haircut would the market accept without stampeding over the cliff?
On the interdependence question Geithner should probably be able to get a better picture when Treasusry asks the banks to open up their books for the ‘stress test’. But I don't think there is any easy answer for the second question. That is probably why Geithner is postponing having to open the barber shop as long as he doesn’t absolutely have to.
Since it is not likely that anyone of the commentators asking for more urgent action on Geithner’s part does have a better answer to the haircut issue, and since a wrong answer there could make things immeasurably worse, it still looks like a good idea to me to temper the desire of wanting to see the miscreants suffer. In other words, let’s caution the Sturm and Drang and cut Geithner some more slack.
FDR v BHO. . .
Submitted by SteveGinIL on Fri Mar. 13, 2009 5:27 AM PDT.
Kevin:
But all legends to the contrary, FDR didn't fix the world in a hundred daysI've been posting this basic time element in various places around the blogosphere: Kevin, you are not only right, but there is more to it than that. The stock market crashed in late October 1929, and FDR didn't come into office until March4, 1933, 3 years and 5 months later. In the meantime, Hoover tried to trust in the free market, which didn't work, and he worried a lot about a balanced budget. Nothing Hoover tried worked, as we all know. But FDR got to observe and learn, as did his eventual advisers - for those 41 months. Now, take Obama's situation. The meltdown was triggered in mid-September 2008, and Obama took office Jan 20, only 4 months and a week later. FDR had 10 times as long to assess the situation, and though he was not in a position to HAVE to know what to do for most of that time, just about everyone connected to government was thinking about it all the time. So FDR and his advisers had all that time to get an idea what to do. And that was large part of why FDR hit the ground running. Can you imagine how bad things would have gotten if the meltdown had happened with 3 years left on Bush's term? Obama would have had time to observe, and would have been wiser upon taking office, and would have been able to move faster. Like Kevin, I don't think BHO has not been taking too long. But action can't wait forever. 3 years from now would certainly have the world clamoring for his ass in a sling, but one year out would not be ridiculous, even if some want miracles and want us back in 1999 next week.
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