I loved, loved, loved, loved this little discussion amongst some pretty awesome economists who have been getting a lot of publicity lately. They not only explain the Geithner plan in some pretty easy to understand terms, this forum provides a little back and forth between some really smart people who happen to disagree. Always nice to get some opposing, reasonable points of view on something so important as whether or not this administration is up to the task of rescuing our economy.
From Paul Krugman:
"View #1 is that we’re looking at an unnecessary panic. The housing bust, so the story goes, has spooked the public, and made people nervous about banks. In response, banks have pulled back, which has led to ridiculously low prices for assets, which makes banks look even weaker, forcing them to pull back even more. On this view what the market really needs is a slap in the face to calm it down. And if we can get the market in troubled assets going, people will see that things aren’t really that bad, and — as Larry Summers said on yesterday’s Newshour – the vicious circles will turn into virtuous circles.
View #2 is that the banks really, truly messed up: they bet heavily on unrealistic beliefs about housing and consumer debt, and lost those bets. Confidence is low because people have become realistic."
Krugman takes view #2 which makes Geither's plan pretty much unworkable.
From Simon Johnson:
"The Geithner plan may prove to be part of the solution, but a relatively small part. If the economy continues to deteriorate, we urgently need a “resolution mechanism for large banks”; in plain English, the government will supervise their bankruptcy and had better figure out how to do this more effectively."
Johnson has been a long advocate of just having the government take over the banks to clean up the mess directly, which is where we're probably headed.
Brad DeLong: Who has been pretty supportive of Obama so far:
"Why isn’t the administration doing the entire job? My guess is that the Obama administration wants to avoid anything that requires legislative action. The legislative tacticians appear to think that after last week’s furor over the A.I.G. bonuses, doing more would require a Congressional coalition that is not there yet. The Geithner plan is one the administration can do on authority it already has."
DeLong thinks it will take $4 trillion dollars to fully extricate all of the toxic assets out of the banks (not all of that has to come from the government) and Geithner's plan falls well short of that, but its what he has the political capital to do right now.
And some more:
" And I suspect that in the end we will be driven down the road to some form of bank nationalization — and if that is where we are going Paul Krugman is correct to say that it is better to get there sooner rather than later. But unless Paul Krugman has 60 Senate votes in his back pocket, we cannot get there now. And the Geithner Plan seems to me to be legitimate and useful way to spend $100 billion of TARP money to improve — albeit not fix — the situation."
And some more:
"Now we have a situation in which all our banks are merged investment-and-commercial organizations, so the FDIC cannot take them over cleanly, and in which all of them are blowing up or threatening to blow up at once.
And so we need a new chapter of the bankruptcy code to deal with large financial institutions that become “bad banks.” I’d advise everyone to read Jeremy Bulow and Paul Klemperer, who have thought longer and harder about this than I have."
"In that case, we will need to end the program as quickly as possible and minimize losses. The next step will have to be bank nationalization, though the political climate will likely be difficult. Sticking with the plan until it completely crashes and burns on the hope that a little more time is all that is needed will make nationalization much more difficult."