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Sorry Krugman, Geithner's Plan is the Least Risky Option
Krugman, who shined so much light in the dark days of the Bush administration, and who is still doing more than anyone outside of This American Life to help non-economists understand the banking crisis, is fundamentally wrong in his assessment of Obama's plan to rescue the financial system.
This is a straw man and suggests why Rahm Emanuel correctly dismissed Krugman as blind to the complexities of governing. Obama has not said that the financial system is fundamentally ok, nor has he said that the banks are "essentially sound." On Thursday, for instance, Obama diagnosed the ultimate cause of the AIG debacle as "a bubble-and-bust economy that valued reckless speculation over responsibility and hard work." Not exactly an endorsement of the status quo on Wall Street, and not a new position either.
There are only two real difference between Obama and Krugman. The first is Krugman's rejection of the argument, made first by Paulson and now Geithner and Obama, that the so-called troubled assets are worth more than anyone is currently willing to pay for them. To Krugman (at least in this debate), the real value of anything is what the market willing to pay right now. This is the principle of mark-to-market accounting, which in other circumstances allowed Enron to steal vast sums by claiming inflated boom-time asset values. Now, Krugman asserts that because a busted bubble has crushed asset values, banks like Citi should be regarded as fundamentally and hopelessly insolvent. He makes this case in the abstract, without having analyzed at all the cash flows that underlie the mortgage-backed securities.
As Krugman suggests, it is possible that Geithner's plan will benefit the bankers at huge expense to the taxpayers. It is also possible that Geithner's plan will work: that by financing and subsidizing investment in the bad assets, the government will buy time for those assets to rise in value. The outcome depends on the economy. If the economy gets much worse, the taxpayers will lose. If it stabilizes, the odds seem good that the cost to the taxpayer will be modest.
Fundamentally, it's a gamble. The thing is, any option is a gamble, and Geithner's gamble is far less risky than Krugman's favored option: a temporary federal takeover of the world's largest banks.
This is the second, and more important, difference between Krugman and Obama: their assessment of risk. Krugman and his allies on the financial blogs make a very strong case that a federal takeover is the fairest, most socially just way to avoid the outright collapse of the mega-banks. They also make mince meat of the conservative arguments typically put forward against "nationalization." What they do not do, however, is make a compelling case that a temporary federal takeover will actually work.
Nor do they even address an even scarier question: would the announcement of a temporary federal takeover trigger a disastrous panic? Is it possible even to imagine a political or public relations strategy that could achieve such a takeover in a way that does not risk a much greater disaster than the one in which we currently find ourselves?
I have great confidence in government. I think Medicaid is more effective than Kaiser Permanente. I think the Marines are more reliable than Blackwater. The Food Stamp program helps more people than the United Way.
But could the Treasury Department run Citibank and Bank of America for the two to three years it would take to reprivatize them? With maybe a few weeks to prepare? The very thought of it makes me want to trade what's left of my 401K for a few gold coins and a shotgun.
That's my reaction, and I'm as liberal as anyone you're likely to find in my Blue State zip code. Now, imagine the reaction of the Republicans and their media abettors. And the foreign governments and financial markets. Shit flinging and raw fear, that seems to me the most likely outcome. Perhaps the takeover option would work in the end. But I'd rather bet on the Geithner plan.
A closing observation: much of the skepticism towards Geithner among progressives follows from a sense that he doesn't "get it" about what went wrong. His instincts and sensibilities align with the investment bankers, not the middle class. So it's natural to suspect that Geithner's plan will benefit those who should be punished, and that, left to his own devices, he would be happy to go back to the status quo that let the finance industry run completely amok for a generation.
Maybe so. But Obama is the President. His budget proposals are taking on the oil industry, the health insurance industry, and the arrayed interests of people in the highest tax bracket. There's no reason to doubt that he will take on the finance industry when the time is right. In the meantime, by choosing the least risky path to avoiding cataclysmic bank failures, Obama once again demonstrates the judicious leadership we need in times like these.
The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system -- that what we're facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
This is a straw man and suggests why Rahm Emanuel correctly dismissed Krugman as blind to the complexities of governing. Obama has not said that the financial system is fundamentally ok, nor has he said that the banks are "essentially sound." On Thursday, for instance, Obama diagnosed the ultimate cause of the AIG debacle as "a bubble-and-bust economy that valued reckless speculation over responsibility and hard work." Not exactly an endorsement of the status quo on Wall Street, and not a new position either.
There are only two real difference between Obama and Krugman. The first is Krugman's rejection of the argument, made first by Paulson and now Geithner and Obama, that the so-called troubled assets are worth more than anyone is currently willing to pay for them. To Krugman (at least in this debate), the real value of anything is what the market willing to pay right now. This is the principle of mark-to-market accounting, which in other circumstances allowed Enron to steal vast sums by claiming inflated boom-time asset values. Now, Krugman asserts that because a busted bubble has crushed asset values, banks like Citi should be regarded as fundamentally and hopelessly insolvent. He makes this case in the abstract, without having analyzed at all the cash flows that underlie the mortgage-backed securities.
As Krugman suggests, it is possible that Geithner's plan will benefit the bankers at huge expense to the taxpayers. It is also possible that Geithner's plan will work: that by financing and subsidizing investment in the bad assets, the government will buy time for those assets to rise in value. The outcome depends on the economy. If the economy gets much worse, the taxpayers will lose. If it stabilizes, the odds seem good that the cost to the taxpayer will be modest.
Fundamentally, it's a gamble. The thing is, any option is a gamble, and Geithner's gamble is far less risky than Krugman's favored option: a temporary federal takeover of the world's largest banks.
This is the second, and more important, difference between Krugman and Obama: their assessment of risk. Krugman and his allies on the financial blogs make a very strong case that a federal takeover is the fairest, most socially just way to avoid the outright collapse of the mega-banks. They also make mince meat of the conservative arguments typically put forward against "nationalization." What they do not do, however, is make a compelling case that a temporary federal takeover will actually work.
Nor do they even address an even scarier question: would the announcement of a temporary federal takeover trigger a disastrous panic? Is it possible even to imagine a political or public relations strategy that could achieve such a takeover in a way that does not risk a much greater disaster than the one in which we currently find ourselves?
I have great confidence in government. I think Medicaid is more effective than Kaiser Permanente. I think the Marines are more reliable than Blackwater. The Food Stamp program helps more people than the United Way.
But could the Treasury Department run Citibank and Bank of America for the two to three years it would take to reprivatize them? With maybe a few weeks to prepare? The very thought of it makes me want to trade what's left of my 401K for a few gold coins and a shotgun.
That's my reaction, and I'm as liberal as anyone you're likely to find in my Blue State zip code. Now, imagine the reaction of the Republicans and their media abettors. And the foreign governments and financial markets. Shit flinging and raw fear, that seems to me the most likely outcome. Perhaps the takeover option would work in the end. But I'd rather bet on the Geithner plan.
A closing observation: much of the skepticism towards Geithner among progressives follows from a sense that he doesn't "get it" about what went wrong. His instincts and sensibilities align with the investment bankers, not the middle class. So it's natural to suspect that Geithner's plan will benefit those who should be punished, and that, left to his own devices, he would be happy to go back to the status quo that let the finance industry run completely amok for a generation.
Maybe so. But Obama is the President. His budget proposals are taking on the oil industry, the health insurance industry, and the arrayed interests of people in the highest tax bracket. There's no reason to doubt that he will take on the finance industry when the time is right. In the meantime, by choosing the least risky path to avoiding cataclysmic bank failures, Obama once again demonstrates the judicious leadership we need in times like these.
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This bit -
"He makes this case in the abstract, without having analyzed at all the cash flows that underlie the mortgage-backed securities."
I think is slightly off. In his Princeton talk during the fall (there must be video somewhere...) he used Hatzius' estimates on mortgage losses to show that the big banks are insolvent.
March 21, 2009 12:41 PM | Reply | Permalink
You can't talk sense to a guy (District of Columbia Danny) who gets home delivery of the Washington Post.
Or who thinks Washington cocktail party tittle-tattle equals wisdom.
March 21, 2009 12:53 PM | Reply | Permalink
Excuse me? Living in DC disqualifies me from having an opinion? I'm a native Washingtonian and proud of it.
March 21, 2009 12:58 PM | Reply | Permalink
Hatzius' paper uses very blunt macro-economic modeling and devotes only a few sentences to losses is mortgage-backed securities. What's needed is close analysis of particular kinds of securities based on various foreclosure scenarios. This kind of analysis just hasn't been done.
In fact, one of the virtues of Geithner's plan is that it will prompt investors to do this kind of analysis as they decide how much to bid for different assets.
March 21, 2009 12:52 PM | Reply | Permalink
You're completely, utterly, categorically, catastrophically, galactically wrong. This is not just the MOST risky "plan", the risk is 100%- it's a guaranteed disaster. We will be propping up incompetent institutions and their incompetent, corrupt managements, at the expense of the taxpayer, and ALSO at the expense of their better-run, sounder competitors- whose business will be damaged by the continued existence of excess capacity in the banking system in the form of government-subsidized zombies. The zombies still will not lend, the good banks will lend less than they otherwise would have, and the economy will continue going down the tubes even as government debt skyrockets.
This has nothing to do with "saving" the financial system, the economy, or anything but the butts of crooks who see that as long as we go on pretending that the demise of the institutions they bankrupted hasn't actually occurred, they can't be held accountable. It's exactly what happened in Japan to create their lost decade. Only we'll have to be be damn lucky to lose only a decade.
For Chrissakes, people defending this shit need to wake up and get a clue.
March 21, 2009 12:54 PM | Reply | Permalink
I'm not dissenting or agreeing, just curious on what resources and facts you're basing your conclusions. Please advise. Thanks.
March 21, 2009 1:00 PM | Reply | Permalink
So the less risky option is?
March 21, 2009 1:04 PM | Reply | Permalink
Take them into receivership, sell off the healthy bits in the form of much smaller companies. That way the huge pile of money the taxpayer has to cough up regardless, at least pays for getting the dead weight of the zombies off the back of the financial system- instead of just being flushed down the toilet. And the problem is prevented from recurring because the dysfunctional mega-firms are gone (and none like them should ever be allowed to exist again.)
When even Alan Greenspan and Douglas Holtz-Eakin recognize that nationalization is essential, I can't understand why liberals would continue to defend the Paulson / Geithner dodge.
March 21, 2009 1:11 PM | Reply | Permalink
Does this mean your resources and basis is based on Greenspan and Holtz-Eakin? If so, be specific please. Again, thanks.
March 21, 2009 1:18 PM | Reply | Permalink
I have a post awaiting approval because it has many links, just for you.
But here are some names of experts whose commentary you should follow on a continuing basis:
Simon Johnson (MIT professor, former IMF economist who supervised the unwinding of similar crises in other countries)
Paul Krugman (who has forgotten more about these matters than the yahoos who insult him around here will ever know)
James K. Galbraith
Dean Baker
Yves at Naked Capitalism
CalculatedRisk
And think- what does it tell you when economists not embedded in Wall Street, all across the political spectrum, from Holtz-Eakin to Galbraith, are saying the same thing? A a minimum, that it is not somehow a left-wing political obsession as often alleged by our TPM crew of obnoxious moderates.
March 21, 2009 1:28 PM | Reply | Permalink
Thank you Steve, I appreciate it.
I am still not convinced of either stance, need to educate myself as to TG's plan and the opposition's.
I do believe however that the statement posted, 'Fundamentally, it's a gamble.' is valid either way. No one really knows the course as we are in relatively unchartered waters.
March 21, 2009 1:40 PM | Reply | Permalink
Might I add to that fine list my personal favorite - Steve Waldman at Interfluidity
http://interfluidity.powerblogs.com/posts/1236636770.shtml
March 21, 2009 1:46 PM | Reply | Permalink
If I understand it correctly, putting the banks into receivership would wipe out shareholders. If that's the case, I can see a huge fallout from that. I own a bank stock and I own mutual funds that own financial stocks. My net worth has already fallen more than 30% and would fall even more if the bank stocks were to disappear, mostly because of the mutual funds.
I am retired and I don't expect my net worth to recover in my lifetime. Since I started with little enough, I can't afford to lose more. There must be tens of thousands more like me.
March 21, 2009 2:49 PM | Reply | Permalink
How much have you really lost? How much money did you invest and what is left? Do you mean that you lost some of the gains you posted from the huge stock market advances?
March 21, 2009 3:39 PM | Reply | Permalink
Suffice it to say that all but one of my holdings is worth less today than it was when I bought it. Likewise dividend income is way down and would be down farther and for longer if the banks went patas arriba. So if I'm correct that receivership would wipe out share holders, I'm pulling for the Obama/Geithner plan.
March 21, 2009 4:36 PM | Reply | Permalink
Well, I would like to see the smaller investors, pensions plans, non-profits, etc. that invested in banks to be made whole. At the same time, I would like to see the wealthy and ultra-wealthy totally wiped out. I think they should be rounded up and put on an island, give them shovels and hoes, enough canned food for a year and seed for next year. And warn them not to eat the seed. No doubt that won't happen.
The ultra-wealthy have taken the whole pie the past 30 years. It is outrageous and shamefull. That should be stopped and reversed.
March 21, 2009 9:19 PM | Reply | Permalink
You're making the same mistake as the derivatives traders: the argument for receivership is coherent but fails to take the real world into account. (Just as AIG's risk models were coherent, as long as you assumed housing prices would never fall.)
We have no idea, really, how a federal takeover will play out. It's very risky. People will freak out.
The Obama plan is to stabilize now, reform later.
March 21, 2009 1:22 PM | Reply | Permalink
Don't you mean "bail out now, reform never?"
This is the oldest dodge in DC. Don't worry about nailing the crooks! We'll take care of them later on. Yeah, right. That'll be the day. It's remarkable how whenever people fall for this sort of thing the actual reforms, if any, have no teeth and do nothing either to punish the crooks or prevent them from doing it again. Just more hooey.
March 21, 2009 1:28 PM | Reply | Permalink
I have to agree with that, oleeb. Case in point, Sarbanes-Oxley. For all the enforcement built into that shining jewel of W's corporate reform agenda, they may as well have printed it on toilet paper.
March 21, 2009 2:55 PM | Reply | Permalink
SOx (Sarbanes Oxley) issues are given very serious consideration at energy companies here in Houston. I find it hard to seriously view its effect as trivial.
March 21, 2009 5:04 PM | Reply | Permalink
Name one crook. And Bernie Madoff doesn't count because he had nothing to do with this. Name a single crook.
March 21, 2009 3:58 PM | Reply | Permalink
Gramm-Leach-Bliley encouraged the insanity. Not only was it all legal, the law practically begged for this behavior.
March 21, 2009 4:58 PM | Reply | Permalink
And the Bush administration encouraged it as well, because it made Bush's crappy economy look better than it actually was. Everyone knew the bubble was going to burst at some point. The Bushies were just betting on a longshot: that the damage would occur after Bush was safely out of office.
March 21, 2009 5:56 PM | Reply | Permalink
You've got that 180 degrees backwards. In the real world, it is always a disaster to damage health business by subsidizing much less competent competitors. THAT, my friend, is the real world.
And what Geithner is proposing is merely a delaying action. The panic you're so worried about will still come, but only after further dramatic depletion of our resources for dealing with it. Geithner is still promoting the utter fantasy that worthless mortgages will ultimately get payed off if we can just keep the leaky barge afloat long enough.
Instead of just sitting on my link-filled post, READ the commentaries to which I linked.
March 21, 2009 1:32 PM | Reply | Permalink
Well said!
Bottom line is that Geithner is living in the fantasy world of believing that the banks are not bankrupt (which they clearly are) and there is only a liquidity crisis which it is painfully obvious is just not the case.
March 21, 2009 2:30 PM | Reply | Permalink
Steve is right, see recent piece by Galbraith from Univ. of Texas:
From Washington Monthly, James Galbraith He is the son of John Kenneth Galbraith.
Galbraith goes on:
The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed speculation in volatile commodity markets such as oil....To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?
March 21, 2009 7:27 PM | Reply | Permalink
How are you so sure that receivership is the only option? All the sources you list are very highly respected progressive economists. I share many of their beliefs, but do they have the same information that Geithner and the Fed have access to? I am also afraid that their ideology (again, which I share) may be clouding their opinion.
I like the original post a lot because it is challenging what I think is becoming conventional wisdom. DC danny also astutely points out that it is not a set in stone fact that the assets are worthless. A few banks may be insolvent, but by no means is this certain. Also, this public-private asset fund does remove dead weight from the banks books, and there's even a chance that the taxpayers will make money here.
Don't forget that there are other elements to the Geithner plan, which all can work in synergy with the public private fund. If the distressed assets start to be priced higher and eventually sold, the banks will have more capital. After the stress tests, the government still may provide capital in exchange for convertible preferred stock. The receivership option is still on the table.
March 21, 2009 3:11 PM | Reply | Permalink
"A few banks may be insolvent, but by no means is this certain."
If they're solvent, why do they need a bail out? Let them give the money back--with interest.
In the real world of business, you extend help, you get concessions. What concessions are the American taxpayers getting? If the problem was lack of credit flow, then open a true national bank that adheres to the strictest lending practices, with the ability to collect through the IRS.
Another problem is the low level of funds in the TARP that go to oversight. A sizable chunk should have gone to forensic auditing, to unwind the twisting road our money went down. The auditors should have subpoena power. The Augean stables of the financial world needs to be cleaned and exposed. Wall Street has been a fixed game, with the referees--government--deep in the financiers' pocket.
March 22, 2009 10:16 AM | Reply | Permalink
You, and several of the other scare quote progressives here, would be a lot more convincing to me on this topic--and most others--if so much of what you propose wasn't so in-my-face obviously based upon emotion and, in particular, rage and a deep emotional need for retribution. Rightly or wrongly, it really does seem to me, as a reader, that you get so furious at the mere thought that anyone in the world of finance might make money out of a plan for recovery that it causes you to instantly reject the possibility that such a plan could work.
God knows I've got my own anger control demons to deal with on a daily basis, so, in justice, I have little room to criticize. Indeed, I have been known to type the occaisional harsh comment myself. (Like, say, this one.) I'm just noting that it rather seriously undermines the reader's ability to put a lot of stock in your judgment in an argument that is, in the end, about judgment.
And make no mistake, that's what this argument is about: judgment and only judgment. A lot of people--Krugman and economists in general most particularly--talk like the consequences of implementing policy A vs. policy B can be fortold like Hari Seldon mathematically deriving the future in the Foundation novels. In fact, no one knows. All one can do is assess risk--a judgment call because the risks cannot be meaningfully quantified--and take action based on one's evaluation of those risks, another judgment call.
You may be right. The Administration's policy may lead to disaster and the one you favor, whatever that is, might lead to some glorious utopia. But it is also at least possible that you, and all those denizens of Akadame whom you cite are the ones who are disasterously wrong--because ivory tower experts may, in fact, have been wrong about something at some time past--and the plan proposed by the administration might somehow, by some miricle, stumble bassackwards into success.
It's the failure of many engaging in the discussion of economic policy here to acknowledge, at least implicitly through tone, the possibility that they might be wrong that disturbs me. That, and the increasingly common attacks on the good faith, motices, and intelligence, the apparant believe that one's own viewpoint is so self-evidently true and good and right that anyone opposing it must be evil.
If I wanted iron certitude that increased in inverse proportion to its relevance to the speaker's area of expertise, I'd have gotten a teaching job somewhere so I could attend faculty meetings.
March 21, 2009 4:22 PM | Reply | Permalink
NC, sobering and penetrating. Beautiful really.
March 21, 2009 5:04 PM | Reply | Permalink
Bravo, NCSteve. You're a bit harsh in denouncing harshness, but I was taken aback by the angry response to this post and am glad you stood up for open discussion.
Geithner's approach may indeed be wrong, and he may also be failing to do the due diligence necessary to pull of his complex plan. But one of the things I like about the plan is that it is a bit open ended and wont blow up if a few assumptions are wrong. In fact, if this plan doesn't work (ie the government can't create a functioning market for MBS even by limiting the downside risk to investors), then people will be more willing to accept receivership as a last resort.
March 21, 2009 5:27 PM | Reply | Permalink
The term "square quote progressives," in particular, was probably unnecesarily gratuitious.
March 21, 2009 5:48 PM | Reply | Permalink
You are being honest. There is an element in the progressive wing that is just as stupid as their counterparts on the right. I am beginning to lose my taste for the movement. I have no love for idiots, especially on "our side," because those are the worst kind. They need to sit back, read Camus' "The Rebel" and come back after letting reality sink in.
March 21, 2009 8:05 PM | Reply | Permalink
Yes..less politically risky for Obama, less financially risky for the bond holders, and investors but a large smelly donkey turd for the tax payers.
Screw the bond holders and investors and when this plan crashes and burns, Geithner, Obama and Congress will have it all over their faces.
Serves them right.
C
March 21, 2009 1:22 PM | Reply | Permalink
Krugman et al are right that this plan continues the troubling trend of public policies that socialize risk and privatize gain.
Nonetheless, it's not at all clear that this is a "donkey turd" for the taxpayers.
If the asset prices rise, as seems likely if the economy improves, the cost to the taxpayer will be modest.
If the government does nothing, and mega-banks fail, the cost to the taxpayer will be catastrophic.
If Geithner's plan moves forward, and the economy craters anyway, taxpayers will indeed be screwed. So screwed, in fact, that the screwing resulting from the Geithner plan will only be a small part of the overall screwedness.
March 21, 2009 1:34 PM | Reply | Permalink
What is the basis for thinking the underlying assets are actually worth anything? Maybe I can post one link without the post being held up, so:
http://firedoglake.com/2009/03/21/james-k-galbraith-reponds-to-geithners-toxic-asset-plan/
March 21, 2009 1:36 PM | Reply | Permalink
While the foreclosure rate is high by historical standards, 90+% of mortgages are still performing. In fact, revenue from MBS' contributed to Bank of America's recent quarterly profit. So while some of the assets are shit (the subprime ones), some are not shit.
Here's a quote from Galbraith's post (that you linked to) that I strongly agree with:
"The way to find out who is right is to EXAMINE THE LOAN TAPES. An independent examination of the underlying loan tapes -- and comparison to the IndyMac portfolio -- would help determine whether these loans or derivatives based on them have any right to be marketed in an open securities market, and any serious prospect of being paid over time at rates approaching 60 cents on the dollar, rather than 30 cents or less."
Geithner's plan will motivate the investors to do this kind of analysis. They will have no motive to buy the shitty stuff, lots of motive to buy the good stuff.
If it turns out that all of it really is shit, no taxpayer financed loans are made, and we are no worse off than we are today. Better, since the case for nationalization would then be much stronger.
March 21, 2009 1:47 PM | Reply | Permalink
Why hasn't GEITHNER done it despite prodding by Congress? Can it be he knows damn well what he'll find, and the truth is highly inconvenient?
March 21, 2009 1:49 PM | Reply | Permalink
Could it be because, unlike omniscient blog commenters, he's actually making real plans involving real people in real world time, rather than making imaginary decisions in Internet time?
March 21, 2009 3:49 PM | Reply | Permalink
We do tend to forget the asynchronous--not real-time--nature of the Internet. In a way, by pre-judging the Geithner plan, we act just like neo-conservative idealogues with no reverence for fact. Logically, Geithner's plan is as coherent--long-term--as receivership.
I mean, what we really want is for the legal system to be a presence within the financial system. Receivership is, as everyone proposes, a temporary deal, with the banks to be resold afterwards. If the laws don't change, then receivership would provide no more justice--in the long-term--than market anarchy.
NC, your sense-making is out of control.
March 21, 2009 5:24 PM | Reply | Permalink
Less snarky.
"Examining the loan tapes" has to be done. I'm absolutely for it. I'd be surprised if it isn't being done. But it is going to be one seriously time consuming, man hour intensive bitch of a task. Based on the difficulties they're running into trying to foreclose, it looks like these fools were so sure every one of these mortgages would be paid that they didn't even take care proper care of the paperwork.
March 21, 2009 5:32 PM | Reply | Permalink
NC Steve - do you know that Geithner's Chief of Staff is a multi-year former Goldman Sachs lobbyist, it might make one who Geithner really wants to protect, the big money boys or the taxpayer. It would certainly make one suspicious of any plan he comes up with that sends billions more to Wall Street:
David Corn
March 21, 2009 7:43 PM | Reply | Permalink
Sorry, no taste for conspiracy theories this week. The irrebutable presumption that finance people keep working for the people they used to work even after they stop paying them doesn't cut it with me.
I've represented a lot of people I liked in my time and many that I did not like. Sometimes I ended up finding something about the unlikable clients that I ended up liking. Other times, I found something in an unlikable client's case that kept me going full bore even though I still couldn't stand the client. And sometimes, I just gritted my teeth and said "somebody's going to represent them and it might as well be me doing the billing."
But you know what? In every instance, like 'em or not, I stopped representing them after their case was over and they stopped paying me. I've never once been tempted to subordinate the interests of a current client to a former client, nor have I ever felt the need to subordinate the interests of my current firm to the one I worked for before--or even one I hoped to work for later.
Maybe that's just me. Maybe that's just my profession. I know about the revolving door and I know how it works. I realize that, particularly in the Bush years but pretty much always, there have been a lot of people in government who eagerly whored away the people's interests to a prospective private sector employer. Sometimes so subtly, they didn't even know themselves that they were doing it and sometimes so blatantly the went to prison for it.
But, still, I have this odd belief that if someone leaves a well paying job for a comparatively low paying job in government in a time of crisis, he's at least entitled to the benefit of the doubt until he actually does something unequivocally corrupt.
March 21, 2009 10:12 PM | Reply | Permalink
It's not a conspiracy theory to note that someone who worked for Goldman-Sachs for five years and lobbied for Goldman-Sachs might be part of and an advocate for the 'culture' of Goldman-Sachs.
By your lame reasoning Obama is a conspiracy theorist because he made the 'no lobbyist' rule that Treasury Chief of Staff Patterson needed the exemption from to get hired!!
March 21, 2009 11:58 PM | Reply | Permalink
He was also a former staffer of Tom Daschle.
March 22, 2009 10:16 AM | Reply | Permalink
Steve, when you are commenting, the limit is 2 links, no matter how they're formatted.
You can have unlimited links when posting to your blog.
I don't know why the system says it is holding them for permission. It's not. The post is gone for good, as far as I know.
March 21, 2009 8:41 PM | Reply | Permalink
Make that 2 links per comment.
March 21, 2009 8:42 PM | Reply | Permalink
Well that sucks. But it also explains a lot, in hindsight.
March 21, 2009 10:17 PM | Reply | Permalink
Have you tried embedding the links with "a" tags? Maybe its just coincidence, but it seems like the system doesn't freak over embedded links as badly as it does over naked links.
March 21, 2009 5:17 PM | Reply | Permalink
Yes, it is pretty clear this is a donkey turd, if not worse.
March 21, 2009 2:32 PM | Reply | Permalink
You write:
"What they do not do, however, is make a compelling case that a temporary federal takeover will actually work."
Hooey!
What you've written is nothing but the "up is downism" of the administration. It doesn't matter who is peddling this stuff. The salesman can't make it smell or taste any better. It's still a shit sandwich.
The plan they propose is an obvious loser and not in the best interests of the people, but they expect since they say it isn't a loser they will be believed. It's clear who Geithner is interested in serving and it isn't the broader American public. His constituency is the predator class. On top of that, the one plan that clearly makes sense and protects the taxpayer according to your position is allegedly unconvincing. But to who other than the corporate ambassadors to government Geithner and Summers? Again, I must say of your argument: hooey!
It seems as though you may be just shilling for the Obama admin's disasterous plans or you've lost your mind to the kool aid. That you're from DC makes me think you could just be an adminstration person executing a little push back in the blogosphere in hopes it will take. I'll assume you're not, but that being in the rareified and very toxic atmosphere of DC you may have been absorbed by the borg and that could account for your failure to see what a lemon Geithner/Summers/Obama is forcing on the nation.
March 21, 2009 1:25 PM | Reply | Permalink
There is enough naked orthodox dogma in this post that it just might turn into a golem and walk away. Just because you call an idea nonsense does not make it nonsensical... It does make you a pundit.
In other words, quit shouting down the discussion with invective and hyperbole. You are losing cool points, and on judgment day, a few cool points might make all the diference.
March 21, 2009 9:36 PM | Reply | Permalink
Well, we disagree. Seems to me the dogma is coming 100% from the administration's side of the street and it's transparently false dogma too. We can and we should be acknowledging reality which is that AIG and the other big bailout beneificiaries are bankrupt and ought to be in receivership. The administration is refusing to acknowledge that because of an ideological orientation that doesn't serve the public interest. On top of it, it doesn't serve the President's political interests either because this will unravel all the good things he says he wants to do and accomplish. It is a massive, gigantic error.
March 21, 2009 10:09 PM | Reply | Permalink
"The very thought of it makes me want to trade what's left of my 401K for a few gold coins and a shotgun."
Rec'd, for the entertainment provided by that sentence alone. Although, I did enjoy the rest of the post as well.
March 21, 2009 1:58 PM | Reply | Permalink
I don't think Krugman's plan is wrong. I just think he'd prefer a different approach--HIS approach. Clearly, the Obama administration hasn't been taking Paul's advice, and clearly, Krugman's peeved. Personally, I think his missives lately have been reading more and more like sour grapes. Krugman's a smart guy. But there's a HUGE difference between being an economist and being an economic strategist. A Nobel prize is an impressive thing, but where's Paul's practical experience? He spent a year as an advisor to the Reagan administration. Yawn. He's a writer, for God's sake.
Krugman's closing statement is correct: this IS an "awful mess". But it's been that from the beginning, so Krugman's carping is a little late. I don't recall a single warning from him about how this whole CDS thing was a recipe for disaster. Not when it actually mattered. He's fond of claiming he's not suited for politics. Fine, Paul. Sit in the back seat if that's what you prefer. But try not to distract the driver.
March 21, 2009 2:16 PM | Reply | Permalink
well said!
I think Krugman is invaluable, but this debate shows his limits. Not only economic strategy but political strategy lie outside his ken.
March 21, 2009 2:20 PM | Reply | Permalink
Ah bunny wabbit, I so agree! Thanks
March 21, 2009 2:28 PM | Reply | Permalink
You are wonderful as always, bunny.
March 21, 2009 2:45 PM | Reply | Permalink
Ohh bunny....
I didn't hear Geithner or his Goldman-Sachs Chief of Staff Patterson talking about Super Duper Credit Default Swaps blowing up.
I do recall Krugman warning years ago you cannot base an economy on 'selling houses to each other'.
It is a cheap shot to claim Krugman is acting out some injured ego trip in his commentary. Two bit bloggers certainly might 'act out' but Krugman is a world class operator not a cheapshot bully with a grudge.
March 21, 2009 8:49 PM | Reply | Permalink
I love Krugman. He was a lonely voice of sanity in an insane time. He still is. But if you don't think the guy has a brusiable ego or is capable of carrying a grudge, well, it makes me wonder if we've been reading the same Krugman for the last several years.
March 21, 2009 10:21 PM | Reply | Permalink
You may be mistaking frustration with a bruised ego.
The country has not run poorly and into a severe recession, and many of the mistakes have been pointed out to little avail by Krugman and others.
March 22, 2009 12:02 AM | Reply | Permalink
meant 'has been' run poorly...
March 22, 2009 12:03 AM | Reply | Permalink
Like Aunt Sam, I am a fence sitter on these issues, don't claim to know enough to choose definitively.
But I do have a question: I keep getting the impression in many of the comments on this board that I'm supposed to accept that nationalization will somehow be cheap for the taxpayer.
Can somebody give me the argument for nationalization in terms of actual outlay?
I'm even more curious after this item I ran into yesterday at the American Prospect: "...the Federal Deposit Insurance Corporation announced the sale of Indymac Federal, which was once Indymac Bank until it went under and the FDIC took it over in order to protect depositors. Following standard procedures, the feds managed the bank -- in the process learning a thing or two about loan modification -- attempted to clear the balance sheets, and ultimately sold the company back into private hands. At a $10.7 billion loss."
March 21, 2009 2:32 PM | Reply | Permalink
Great point! I may be wrong, but I don't think the Krugmanites even claim that recievership will be significantly less costly.
Rather, the claim is that a bailout-in-leiu-of-receivership will be costly AND benefit the malefactors.
It's a moral argument as much as an economic one, though to be fair I think the nationalizers do claim it will be somewhat less expensive and, at least, more decisive. And that bailed-out-banks will be more likely to fail again at taxpayers expense.
March 21, 2009 2:46 PM | Reply | Permalink
I think the problem with the moral hazard argument in this case is that, as Obama said on Leno the other night, no one did anything illegal. Sure, people were taking big risks, which, in retrospect turned out to be far riskier than anyone imagined. But there's nothing wrong with taking risks. It's how the game is played. It's how you make big money. So now those same risk-takers are tits deep in hot water and we're bailing out their boats. If this were a single bankrupt corporation or a single failing bank, we'd let them sink, and they'd deserve it too. But there's no real precedent for this, and it seems to me it's beyond ridiculous to try to apply concepts like moral hazard in the face of a global economic firestorm. We'll figure out who deserves to be punished later. And we'll make damn sure this doesn't happen again. But right now, please, someone hand someone a bucket.
March 21, 2009 3:56 PM | Reply | Permalink
Receivership doesn't bailout unsecured debtholders and allow shareholders to hold what are essentially cheap warrants (unexpiring call options) that pay off hugely with success.
Krugman's plan gives current bondholders and other creditors a haircut. What's upsetting so many of the experts about Geithner's plan is that it holds creditors sacrosanct at the expense of the taxpayer.
March 22, 2009 5:03 AM | Reply | Permalink
Highly recommended.
You sure did elicit a lot of ad hominem flack for this, but this is very well argued.
So far, receivership has been pushed as if it were an option without any unintended consequences or external costs, and you have hinted that such a policy involves risks and challenges which its proponents are not addressing in their advocacy for it.
Screwing international (yes, those foreigners) bondholders to take a loss as a result of receivership and thus tailspinning their economies seems to make sense only in a scenario in which we can immediately continue surviving without the foreign flow of credit once we have decimated international confidence in our private sector bonds. It is hard to fathom the US operating without this confidence, and I doubt we can withstand the foreign lending crunch after Paul Krugman's day of vindication occurs. I am welcome to reassurance that this unintended consequence is not of any real consequence or that it is a mere figment of my lack of expertise in economics or finance. I realize that a flaw in my argument would be that receivership of bad banks increases confidence in the good, but I harbor the fear that foreign governments may not be so nuanced after they've lost scores of billions in bonds, an investment form which should not be considered risky. I suspect they would instead be dealing with their own local pitchforkers in their own countries. Perhaps there are receivership proposals which spare bondholders, but I have not seen any.
I will not get into the incessant accusations of Geithner's allegiances other than to say that they paint Obama as either the greatest accomplice or sucker, neither descriptions fitting with everything else I know about the man.
March 21, 2009 2:40 PM | Reply | Permalink
Wow. Well said.
March 21, 2009 2:43 PM | Reply | Permalink
Good points all. I think one mistake some are making is thinking that Obama, Geithner, Summers, et. al. should be out for some sort of "justice" in all of this. That's clearly not a concern, nor should it be. I much prefer their goal, which is to restore the health of the economy and to preserve our capitalist system. If Obama has demonstrated one thing recently, it's that he's not the "socialist" the wingers have accused him of being.
March 21, 2009 3:36 PM | Reply | Permalink
I don't have enough economic learnin' to argue whose plan is better but thank you for putting out another POV. When I checked into TPM and HuffPo this morning and saw the criticism of Geithner's plan, the one source or link provided was to Krugman.
I know he won a Nobel prize, but he is just one man and I find it disturbing that the Left demands that Obama shuts out his own team to listen to Krugman. I know what you think of Geithner, Summers, etc. but Krugman isn't saying anything original, he isn't saying anything that these guys haven't heard or read. The WH is tuned in, if they know about Cramer v. Stewart then they have to know what Krugman is saying. And they know what Dean Baker and all the others are saying - there is no shortage of suggestions from the outside.
If Obama is not following what you all say is obviously a better idea, I am left to wonder if the problem is deeper, wider and more complex than the media is saying - And that frightens me!
March 21, 2009 2:50 PM | Reply | Permalink
I understand your feelings but it seems to me if all the "smart" people truly knew what was best for the country, they would be running the show. At the very least, they would be running for office.
I think dissenting opinions are good, so are counter arguments but at the end of the day, there has to be one leader.
Enjoyed your post dcdanny. Rec'd
March 21, 2009 3:07 PM | Reply | Permalink
Thought he has not come out and said it in these exact words, it's pretty obvious what Geithner wants is to re-inflate the housing bubble. At which point we will be exactly back where we were.
DUMB.
C
March 21, 2009 2:54 PM | Reply | Permalink
They will settle for re-inflating any bubble, commodities, stocks, or housing. Anything that will pump up speculation and loan arbitrage (until the next crash).
March 21, 2009 7:52 PM | Reply | Permalink
WOW. Now you know how to stir up a hornets nest!!!
A lot of rec's to go with the comments though.
"The first is Krugman's rejection of the argument, made first by Paulson and now Geithner and Obama, that the so-called troubled assets are worth more than anyone is currently willing to pay for them. To Krugman (at least in this debate), the real value of anything is what the market willing to pay right now."
I can at least understand this. I do not mind strong discussion.
March 21, 2009 3:23 PM | Reply | Permalink
Nothing has intrinsic value. It only has value at the moment it is traded. What good is gold when you're dieing of thirst in a desert. What good is land that cannot grow anything.
"What the last fish is caught, then you realize
you cannot eat money."
C
March 21, 2009 9:07 PM | Reply | Permalink
One other thought: To my mind, the reason these assets are "toxic" is not because they're worthless (as Krugman seems to suggest), but because they can't be accurately valued. These instruments are so far removed from the equity they represent that no one can say for sure what they're worth. Which is why the banks are holding tight to the paper: they're waiting for someone to tell them if what they're holding has any value. Krugman's sarcastic statement about the assets being "misunderstood" is closer to the truth than he's probably willing to admit. This is a crisis of confidence. And nationalizing the banking system certainly wouldn't be helpful in that regard.
March 21, 2009 3:26 PM | Reply | Permalink
Here's what I don't get about the argument Krugman's been hammering for weeks now. He says the banks that own a lot of CDO's are "zombie banks" that must be killed, purified and then, uh, reanimated, which makes the zombie metaphor kind of a dead end. But I digress.
In Krugman's argument, the CDO's are next to worthless, because a thing is only worth what someone will pay for it and no one will pay much of anything for CDO's of any kind right now. In a real sense, that is true, but it's true because it is a definional tautology. "What someone will pay" is a definition for "worth," therefore a think no one will pay much for is next to worthless.
The unstated assumption in that definitonal tautology however, is that the information upon which the market's valuation of the asset is based is both rational and factually correct.
And that's where I have a problem with Krugman's argument. By insisting that these assets are intrinsically and irrecoverably worthless such that Citibank must be burned, razed and sown with salt, he's implicitly stating that the market's valuation of Citi's CDO's is rational and that' market's information is correct. The problem is that this means he is pinning his entire arugment upon a current valuation made by the very same market thatcaused this problem by overvalued these same assets based upon what everyone now acknowledges was irrationality and information that was more delusion than data.
So upon what basis does Krugman now contend that that market now has more and better data and a better emotional control than it did when it was bidding these things up into the stratosphere? He doesn't say--and indeed conspicuiously ignores this whole issue.`Instead, we get sneering about "misunderstood assets."
Some of these assets have to have still be producing income. Indeed, given some of them have to be producing 100% of the income they were expected to produce. That's the way their structured. An issue of bonds gets paid from the stream of revenue from a particular pool of mortgages. The class A bonds get first dibs on that income, the Class B bonds get paid from what's left over after the A's are paid and the C bonds get whatever's left after the B's are paid, and so on. Unless the foreclosure rate in the pool of mortages backing the debt is 100%, the A's have to be getting paid in full. Given the rate's I'm seeing in the paper, the B's are almost certainly paying back at 100%. And, indeed, the "C" must be getting something, though less than 100%.
Appraisors, accountants and lawyers routinely use measurements of value other than mere market value. In particular, appraisors, accountants and lawyers often value assets for which there is no ready market using the income approach. The CDO's--even the really, super crappy sub-prime backed CDOs--are generating income. Again, I know this because the mortgage default rate is not close to 100%. So they have value. The problem, as I understand it, is that no one is buying even the decent respectable Class A and B CDO's backed by 30 year, high down payment mortgages because they do not do not know how bad the foreclosure is going to get and thus cannot figure out how much to pay for them.
And that leads me to the other thing I don't get about Krugman's--and, especially the scare quote progressives nationalize/recievership/bankruptcy argument.
What do they propose do do with these assets after they nationalize the banks? Sell them for whatever anyone will pay right now? Now that's a prescription for rewarding the evildoers--they'll buy them up for a song and profit handsomely when the economy turns around, default rates bottom and market values can again be determined. Transfer them to the government for value? Why would you do that? Aren't they "toxic" and "worthless?" Transfer them to the government for nothing? Doh! Stupid Fifth Amendment!
March 21, 2009 5:11 PM | Reply | Permalink
You expect too much fore-thought from the Place de la Concorde mob.
March 21, 2009 5:26 PM | Reply | Permalink
Slightly OT but if you're making a reference to the 1789 French Revolution popular uprising, it probably should be Place de la Bastille. ;)
March 21, 2009 8:01 PM | Reply | Permalink
The reference is actually to the location of the guillotine itself and of the blood thirsty mobs, the site of the beheading of Louis XVI, Marie Antoinette, and many other notables. What was then known as the Place de la Révolution was later to be renamed the Place de la Concorde, as per Wikipedia. The gory details are heart-wrenchingly narrated in Anatole France's Les Dieux Ont Soif (The Gods are Thirsty).
The Place de la Bastille did not exist at the time and only came to be after the Bastille prison was torn down.
March 21, 2009 10:38 PM | Reply | Permalink
As an economist, Krugman knows better anyway. He well understands that money has no intrinsic value. It's representational--a placeholder for past transactions and a medium of financial communication that records the pressures of demand and scarcity at a particular moment in time.
These things are worth precisely what someone is willing to pay for them at the moment of sale. And once investors have had a little time to gather their wits about them and regain their confidence in the economy, a rational valuation will occur. This is like a capitulation in reverse. Sort of. :)
Krugman is essentially arguing that the losses are already locked in and that the Obama administration is hammering nails into the coffin. I couldn't agree less.
March 21, 2009 5:42 PM | Reply | Permalink
Exactly!
The most compelling part of Krugman's critique is that Geithner's plan (like so much else in recent public policy) socializes risk and privatizes reward.
Doesn't mean the plan isn't the best among unpalatable options. Nor that Obama will fail to eventually reform the financial system in a way that restores fairness.
March 21, 2009 5:49 PM | Reply | Permalink
Steve:
I think, you have not only hit the key point, but have done a good job of exploring it. I'd like to offer my amplification of some of your comments. The problem with free-market theory is that it assumes the following among it's key principles:
1) All participants have equal access to information about the market (no insider action).
2) No participant has any greater ability to affect the market than does any other participant(no market gorillas).
3) All participants act in a rational manner (no emotionalism, such as greed or fear).
All three of those principles can be turned false by the behavior of humans. Which means that free-market theory is based on an academic fantasy. It depends on humans not behaving like, well, humans.
Free-markets can appear stable until sufficient corruption of the above principles triggers them in to catastrophic instability, i.e bubble and bust. The same human behaviors which over-valued the mortgage/housing asset market in the first place are now likely under-valuing it.
March 21, 2009 8:55 PM | Reply | Permalink
Hence the recent ascent of Animal Spirits to the top of the D.C. econowonk reading list.
March 21, 2009 10:25 PM | Reply | Permalink
I find it fascinating that the faults in free-market theory mirror those which conservatives has traditionally applied to liberal philosophy. Which is that it depends on humans not behaving like humans, valuing egalitarianism, community and such.
That incoherence between their economic and social philosophies seems unimportant to conservatives. The only coherent application of philosophy by them seems to be that of stuffing ones pockets with as much money as is possible for as long as is possible.
March 23, 2009 10:24 AM | Reply | Permalink
I like and respect Paul Krugman but since the inauguration he has gone from coming up with good ideas, and solutions to being one of the administration's biggest, bitterest critics.
Ya think he had cabinet level aspirations cause it sure reads like sour grapes to me.
March 21, 2009 3:57 PM | Reply | Permalink
Ya think he really got over Obama winning the nomination?
March 21, 2009 7:15 PM | Reply | Permalink
He took his name out of contention - said he couldn't do that and keep his day job.
That said, I agree with you about his demeanor and prose the last few weeks.
Hmmm.
March 21, 2009 7:54 PM | Reply | Permalink
Viva is frightened by the possibility that the problem is "deeper, wider, and more complex..." than most realize. I agree.
1. The automobile industry is devestated. Hasn't made a profit in years and no prospect of making one in the near future. Not just Detroit, but all of her suppliers and dealers.
2. Residential Construction industry is being decimated. The house builders won't make a profit again for years. Commercial construction is right behind them - completing projects in a pipeline that is normally about a year or two long, with very little to replace.
3. Banks, as we know, are virtually insolvent. Not just the biggest banks. The locals are not lending at a clip sufficient to make the bank a profit. How will they make a profit if they don't lend? Their only real product is loans and they are refusing to sell their product. They are sitting there paying their staff and losing money.
4. Insurance Companies are paid in advance (premiums). What did they do with that money? They lost about half of it in the stock/bond market crash. None of their contingent liabilities have decreased, but their resources to pay those liabilities are now inadequate. If you have an annuity, you may never get paid.
5. Newspapers/media in general. Advertising dollars are way way down, and when they do sell an ad, they get paid very late, if at all.
etc, etc, etc.
This snowball is gaining speed.
Who is doing ok? Well, as always, lawyers. Lots of suits being filed for non payment of bills. Anybody on a pension/social security is doing better, those checks are still arriving and most prices are stable, even decling.
March 21, 2009 4:09 PM | Reply | Permalink
I wonder if your snowball will melt. But you make some good points about insurance company assets supposedly held to be able to pay off future claims.
Belt-tightening isn't easy. The point of stimulus spending to the heat things up so the snowball (deflation spiral) melts a bit before it picks up momentum.
It seems we have economic problems, fiscal problems, financial problems, and criminal activities all at once here.
March 21, 2009 7:31 PM | Reply | Permalink
Well, I sure hope you are right. Believe me, my stake is in this economy turning around. But, I am pessimistic. I think the ultra-wealthy have lost control of the monopoly game. I think this economy is spinning out of controll. This is not a normal recession.
When will the automobile industry ever again make a profit? That industry has changed permanently and it alone is about 15% of our economy. What about all the money they owe - the bank loans and bonds sold to investors ans institutions?
How can the insurance industry ever get back to par unless the stock/bond market resumes its lofty levels? Banks are losing money, but wait until 20% of their loans go bad. Then what?
Look at commercial real estate - it is way over built and buildings are losing tennants daily. Most carry a big mortgage - another set of losses comming up for the bankers.
All the suppliers of residential construction are losing money - no prospect of that market recovering soon.
Airlines, trains, bus companies - all losing money.
March 21, 2009 9:35 PM | Reply | Permalink
"Believe me, my stake is in this economy turning around. But, I am pessimistic. "
I am a pessimist too, but my stake is in progress. The economy is not a sacred cow even if it's treated almost as if a Golden Calf by some.
The economy needs to contract. Really. The Financialization Bubble had far too much imaginary content, and was leading to anomalies such as reports that 44% of profits were from the non-productive finance sector. That means GDP is grossly inflated, basically fake, when it comes to the ordinary real world.
I'm not saying the economy needs to shrink 44%, but I do think something between 8 and 15% is a must.
March 22, 2009 4:30 PM | Reply | Permalink
Lawyers are not doing well. Most firms, even some of the largest, have let scores of people go since the end of last year. It's caused rather a reign of terror among young law associates who've been axed left and right.
The law firms clients aren't paying either.
March 21, 2009 9:48 PM | Reply | Permalink
Anna, I appreciate your response. My comment about the lawyers was flippant. My contacts with lawyers is quite limited. The comment was based upon one local lawyer's comments at a dinner party - not much of a base to form an opinion.
March 22, 2009 9:15 AM | Reply | Permalink
In this economy, lawyers are getting laid off.
March 22, 2009 12:42 PM | Reply | Permalink
Geithner and Summers helped create this entire mess, so they are not exactly objective analysts of our problem.
If they can save some face, and gain unheard of wealth and power for their already incredibly wealthy (and criminal) friends and colleagues, it must be awfully tempting to deny the scale of our problems.
If the ship sinks, they will be on luxury helicopters with their friends, convincing themselves that nobody could have seen that glowing, blinking iceberg coming.
March 21, 2009 5:27 PM | Reply | Permalink
I've got no reason to trust Geithner.
But after two years of watching Obama very closely, I have more reason to trust him than any other politician in my lifetime. Obama is not like Bush -- he would not stake his presidency on a policy he doesn't really understand and that has not been thoroughly thought through.
And I think it may be rather the Krugmanites who underestimate the scale of our problems. A failed receivership plan would destroy the Obama presidency and with it any hope for progressive governance and a decent standard of living for most Americans.
March 21, 2009 5:42 PM | Reply | Permalink
"Geithner and Summers helped create this entire mess..."
How so? And which "criminal friends" are you referring to? Are you saying that someone at AIG did something illegal? Enlighten us, please.
March 21, 2009 5:48 PM | Reply | Permalink
Summers and his mentor Rubin squelched attempts to regulate CDSs in the late 90s.
Geithner is a protege of Summers (and served under in when Summers was Treasury Secretary) and, as former NY Fed chair, was on the spot when the problems were building and did nothing to deal with them.
You're commenting on the matter without knowing such absolute basics about the history of this problem?
Here is the situation, in a nutshell. In the go-go years, finance became an unprecedentedly and unsustainably large sector of the economy; financial canoodling drained both capital and good brains from productive enterprises. There is no recovery without shrinking the bloated financial sector back into its proper function as an intermediary for investment in industries that actually produce wealth. Bailing out the zombies to keep them living in the style to which they have become accustomed is a huge, vastly expensive step in precisely the wrong direction.
March 21, 2009 6:34 PM | Reply | Permalink
Summers was a student and cohort of Martin Feldstein at Harvard. Feldstein was also on the Board of Directors of AIG since 1988 up until at least 2005.
Feldstein is now also an Obama advisor like Summers, Feldstein is on Obama's Economic Recovery Team.
March 21, 2009 8:03 PM | Reply | Permalink
Oh, come on. I wanted billwalker to reply--not you. You wrecked my setup. The reason I asked such a basic question was because I was pretty sure billwalker had no idea what he was talking about. I wanted to know that he wasn't simply spouting crap he heard on CNN or Fox. And his cut/paste reply from Wikipedia sorta proves that he has no clue, doesn't it? If YOU had said what billwalker said, I wouldn't have asked the question. I think we both know that I understand the history of the situation.
March 22, 2009 11:31 AM | Reply | Permalink
From Wikipedia:
"In October 2003, (Geithner) was named president of the Federal Reserve Bank of New York.[14] His salary in 2007 was $398,200.[15] Once at the New York Fed, he became Vice Chairman of the Federal Open Market Committee component."
"The Federal Open Market Committee (FOMC), a component of the Federal Reserve System, is charged under United States law with overseeing the nation's open market operations.[1] It is the Federal Reserve Committee that makes key decisions about interest rates and the growth of the United States money supply.[2] It is the principal organ of United States national monetary policy."
He helped Greenspan and Bernanke keep interest rates low when it was very obvious that we were in the middle of a housing bubble.
"In March 2008, (Geithner) arranged the rescue and sale of Bear Stearns;[9][17] in the same year, he played a pivotal role in both the decision to bail out AIG as well as the government decision not to save Lehman Brothers from bankruptcy."
March 21, 2009 6:43 PM | Reply | Permalink
Thanks billwalker. I can actually get Wikipedia on my computer too.
March 22, 2009 11:34 AM | Reply | Permalink
My problem with Krugman is he seems to have become for the left what Limbaugh is to the right. If Krugman speaks, it's unchallengeable. And Krugman is like Limbaugh in that he is using his perch in the media to criticize the president. I think a little less worship of Krugman would be a healthy thing for those of us who laugh at the right for bowing to Limbaugh's every word.
March 21, 2009 7:01 PM | Reply | Permalink
IT"S NOT ABOUT KRUGMAN. Sorry to shout, but he is only one of MANY knowledgeable people who think this (and its previous variants going back to Paulson) is a terrible idea. It's just lazy to personalize it in that way.
March 21, 2009 7:05 PM | Reply | Permalink
Steve, Still waiting for that post. Thanks.
March 21, 2009 7:58 PM | Reply | Permalink
I must have put too many un-shortened links in it. Just go read Galbraith's recent comment on Firedoglake (and the longer article of his to which he links within that) and recent posts on Calculated Risk and naked capitalism. Also read Matt Taibbi's new Rolling Stone article on Wall Street, easily found via Google.
March 21, 2009 8:03 PM | Reply | Permalink
P.S. I see Jon Corzine, who had many years' experience on Wall Street before going into politics, has also just come out in favor of nationalization. See the story on "TPM Capital Wire".
March 21, 2009 8:07 PM | Reply | Permalink
True, Krugman is not alone, see link above, repeated here. Galbraith, Univ. Texas, Washington Monthly
March 21, 2009 8:07 PM | Reply | Permalink
I think a lot of people are really not understanding what this plan entails. So I'm going to post a comment from over on naked capitalism that I also posted in a TPMDC comment thread just now. THIS is what we're talking about here:
March 21, 2009 7:08 PM | Reply | Permalink
Much appreciated.
March 21, 2009 7:42 PM | Reply | Permalink
Steve, help me out here.
If banks are allowed to fail, as someone mentioned above, the shareholders would take a hit. And not all shareholders are rich folks--there are a lot of mutual funds who "probably" hold bank/financial stocks. A lot of folks have IRAs and 401Ks who don't come close to being rich.
Also, I think I know that the FDIC will make good a depositor to $250,000. But if the number of failures are high, I think the FDIC can't just increase the premiums to the banks and will have to have federal money. Also, are we saying that depositors need to be shaved over $250,000? How many business accounts would that be?
How widespread would this be? There also seem to be two schools of though about what should have happened in the Great Depression--banks were allowed to fail and one group of today's economists say this was the wrong decision and caused the depression to extend for far longer than it would have with government support. Do I know the answer to that one? No. But I think it should give pause that two different groups of economists exist which simply proves that economics is not as much of a science as we may think.
Just my questions on this mess.....
March 21, 2009 8:08 PM | Reply | Permalink
Nobody said "allowed to fail" (a la Lehmann, for example)- that's not a good description of what happens, for example, when a bank like IndyMac is taken over by the FDIC. And the shareholders have pretty much already taken their haircut- have you looked at the stock process of these institutions lately? Geithner is partly about protecting bondholders rather than shareholders (whih to the extent really necessary, could be done far more efficiently during a reorg without greasing private middlemen), but MOSTLY about protecting the existing corporate structures and their executives. Which is crazy.
Again, please read that naked capitalism comment I reposted so you understand what Geithner is actually proposing. Does it sound good to you?
March 21, 2009 8:15 PM | Reply | Permalink
I'm simply trying to figure out the difference between two possible alternatives, Steve. I understand you're trying to point out a major "con" with the proposed plan. I'm simply trying to see if letting every damned financial institution in the country fail eliminates financial havoc. If you don't want to address it, fine.
BTW, Indymac didn't let folks off completely unscathed. Apparently 10,000 uninsured depositors lost $270 million and the bridge bank is still there since a buyer is not found. How many Indymac-like failures can we expect? Will this overwhelm the bridge bank efforts for this unknown number of failures? What happens with a panic? Do we simply expect that not to happen?
If these insitutions fail, would this create a "credit event" and trigger possible payouts on existing CDS contracts?
And I also make note that changing the existing regulations, and possibly some laws, is something under discussion in the Obama administration right now. It's not reported here; check Huffington Post for the story.
March 21, 2009 9:25 PM | Reply | Permalink
Steve - this bit "I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm." is silly. Nobody is writing CDS on this toxic stuff anymore, nor can I imagine it could be trading anywhere in the range of 1000bp. There's investment grade bonds out there with CDS trading at around 700bp. Who the hell wrote this comment at Naked Capitalism?!
March 21, 2009 8:29 PM | Reply | Permalink
Do you understand what a "toxic asset" is? Apparently not. Yet you think you know better than an insider.
March 21, 2009 8:34 PM | Reply | Permalink
Relax. Do have a link to that post/comment?
March 21, 2009 8:39 PM | Reply | Permalink
Sorry, the unthinking loyalty to Obama /Geithner by some (not you) is getting me steamed so I overreacted. The "href" tag doesn't seem to be working properly (at least in preview) so I hope including the full link doesn't deep-six this comment:
http://www.nakedcapitalism.com/2009/03/investor-on-private-public-partnership.html
March 21, 2009 8:49 PM | Reply | Permalink
Our two posts just got crossed, Steve. This looks a lot more complex than I thought, as I read through the whole post at NC...
March 21, 2009 8:52 PM | Reply | Permalink
Ok, Steve, found it. Check out the Update:
"One Kid Dynamite in comments suggested the CDS proceeds were overstated. If we adjust for his assumption, the Citi loss is reduced ($9.5 million versus $14 million in example). The investor would also show no profit on a $2.25 million investment (note the quick and dirty analysis did not allow for time value of money, which means he loses money). If the investor anticipated that, it means he would not bit at all. So you need either overly optimistic investors or an even richer subsidy from Uncle Sam. And that's before you get to the other two issues, first, that even this example has Citi showing a loss on sale of dud assets (which we don't see happening, the whole point is for banks NOT to show losses). So the bid would have to be even higher, the full $80 million."
Like i said, relax.
March 21, 2009 8:47 PM | Reply | Permalink
Steve - the take-away line in Smith's post is probably this
"That means the program will have to offer even richer subsidies or will elicit very few successful bids (and then only on the best of the dreck, where the "real" value of the paper appears to be not too horrifically below the level at which the bank is carrying it on its books)."
Which is more or less why I'm against the Geithner plan. It won't work. It won't get price-discovery for most of these assets. OR it will need to get rejigged once again to offer even greater subsidies. In the meantime the credit markets will get worse, and the money locked into this program won't go to more useful purposes.
March 21, 2009 9:05 PM | Reply | Permalink
Obey, would you take a look at my Salad blog post from today, Sunday?
I'm getting close to getting my mind wrapped around this, and could use some prodding (of the helpful kind, critical or informative).
March 22, 2009 4:37 PM | Reply | Permalink
Will do. Missed that, thanks for letting me know...
March 22, 2009 4:40 PM | Reply | Permalink
I think you distort Krugman's points and words to make a strawman. That doesn't help. I read his post (and commented there, about #35 I think, 2:12pm).
There are various values here. And, for each value there may be more than one plausible method. So there is a multiplicity of ends and means. This is the moral dilemma in a nutshell.
I don't see that it has to be a gamble. Gambling is different from risk taking in general. There is risk, and as they say there is known risk and unknown risk.
Your "panic" question is unreasonable at this stage. The question has been on the table for months now.
You mention Citi and BAC, but I see no reason to think they will take 2-3 years. That said, I'm not arguing for "nationalization".
What are some of the values here?
1 Save banking (hasn't this been done already)?
2 Save investors whose money went to homeowners etc.
3 Unwind problematic contracts such as via AIG
4 Keep the government running
5 Keep voters and taxpayers from being too unhappy
March 21, 2009 7:40 PM | Reply | Permalink
Eds - stop thinking and BE AFRAID. just hand over the money...
March 21, 2009 9:17 PM | Reply | Permalink
That does seem to be Hank Paulson's idea, but why are you joking about it here and now?
That's a half serious question... and I hope you aren't just teasing about getting back to the blog later tonight!
March 22, 2009 5:09 PM | Reply | Permalink
"Please, please don't make us analyze the terms and purposes of Geithner's program. We so, so want to believe. Thank you." Aunt Sam, anna am & hrebendorf.
March 21, 2009 8:27 PM | Reply | Permalink
Indeed. Far better to believe one has all the answers as you do.
March 21, 2009 9:43 PM | Reply | Permalink