In these terrifying times, when our government is taking huge risks with the future of our national fortunes (and the risks are huge whatever policy is chosen), there is a lot of understandable anxiety around here. In short: Whom should we believe? The Obama Administration in the person of Timothy Geithner? Or the dark warnings of Krugman, Stiglitz, and Roubini?
Like many here, I am a progressive. I've swooned over almost everything Krugman has ever written (except for the pro-HRC interventions in the primary): in the days of Times Select, I even wrote Mr. Sulzberger a letter telling him that the national interest demanded that Krugman's refutation of Social Security privatization be released from behind the wall of paid registration. But I hope I can also keep my mind open to relevant views and facts that don't make it into Krugman's columns.
Like many here, my Ph.D. is not in economics. I have to parse all the information as best I can and decide whom to trust. When Joseph Stiglitz boils everything down to this ugly fact (if it is a fact, which I can't know)...
America could have saved its banks, but let the shareholders go, for far less than it has spent.
...well, my heart sinks at the thought that our chances to address health care and global warming are being burned away so frivolously to protect bankers & shareholders.
In my inexpert survey, however, I have found a couple of salient points that give me some reason to hope that Geithner and Company will actually deliver us the Govermnent By Facts and Intelligence we elected Obama to provide, whatever bumps on the road may come from the deeply uncertain mess we're in.
1. Geithner and Obama do not have the power to nationalize banks.
I could be proven wrong about this (please provide refutation in the comments), but after assuming nationalization was an executive-branch power (and, I confess, even hectoring my fellow bloggers to demand it), I have come to doubt that any such power exists (at least with a scope to take over the troubled divisions of institutions that don't declare themselves insolvent or find themselves in bankruptcy). An "official" speaks as follows to Ezra Klein (via OpenLeft):
"Many of the critics," one official sighed to me, "are underestimating the difficulty of their counterfactuals." Ben Bernanke does not appear to think the administration has the legal authority to forcibly take investment banks into receivership. What happens if a legal challenge disrupts the process?
Virtually no one thinks that Congress is willing to quickly offer either the legislation authorizing such an action nor the massive upfront money that receivership would require. Will Ben Nelson and George Voinovich vote to take control of the banks? And what happens to the market while Congress is debating? And to Congress if the market dives?
Delay in our present circumstances can damage us like nothing else. We cannot afford to throw the Administration's policy into uncertainty when the existing legislation already allows enough flexibility to address the crisis. Now of course we need a clear path to taking more aggressive action to remake financial institutions that have become "zombies" unrescuable by any amount of liquidity-unfreezing: that brings me to the second point.
2. The Administration has not turned their attention away from the issue of identifying and restructuring insolvent banks.
You've heard of the "stress tests" that many financial institutions are undergoing. In our hysteria, we have tended to forget that they are meant precisely to determine the degree to which Krugmanesque "Swedish" interventions may be required to restore the financial system.
Greg Mankiw today provides us with a model of how an Ivy League Econ prof who favors bank recapitalization can react with something other than Krugmanesque panic, and can in fact expect that restructuring/recapitalization will be pursued as competent judgment may require. Clarifying similarities between the latest Treasury plan and his own earlier ideas, Mankiw underscores that his ideas aimed squarely at recapitalization:
...our proposals are similar. However, I was aiming at recapitalizing the banks, while Treasury is now aiming at removing toxic assets from their balance sheets. The issue of further recapitalization seems deferred until the results of the Treasury's "stress tests."
"Deferred": not forgotten. Let's have more patience and give more attention to the "stress test" process.
Yes, there are some legitimate issues with the stress test. We must insist that:
A. stress test results not be suppressed if unfavorable;
B. restructuring must result when stress testing reveals de facto insolvency or unacceptable risks to the system and to the economic recovery.
Heeding Al Giordano's warning that we'd better make our peace with Geithner, let's focus our energies on insisting that the "stress testing" path is pursued as aggressively as possible, without undue timidity in the face of Big Money interests.
UPDATE. Geithner to Seek Broader Powers to Seize Troubled Firms
The crisis surrounding the American International Group was a near-tragedy that underlines the need for broad new government authority to regulate or even take control of financial institutions other than banks, the government’s top fiscal officials told lawmakers on Tuesday.
This is good news and confirmation that Geithner's team is not in some black hole, unprepared to take over banks as information and circumstances develop. I do hope that his diminished standing among the talking heads (for which we on the left have to take some of the credit) does not weigh much with Congress. Please contact your Congressional representatives to affirm your strong support for whatever government intervention in the financial system may be helpful to the recovery.