"Which Plan is Best?" Follow-Up: Who Can At Least Tolerate the Geithner Plan?
James Surowiecki reacts to the post "Which Plan is Best?":
Who Can At Least Tolerate the Geithner Plan?, by James Surowiecki: Most of what’s been written about Tim Geithner’s plan ... has been, unsurprisingly, negative, since Geithner’s plan does not involve the preferred solution of most bloggers and pundits: nationalizing the banks. But there are some interesting exceptions. The most useful post in terms of understanding the thinking behind the plan is Brad DeLong’s FAQ. ... And Mark Thoma of Economist’s View, who is actually an advocate of nationalization, has nonetheless written two excellent posts explaining why there are problems in the market for toxic assets and why the Geithner plan, while not ideal, could work in solving them.
Thoma’s conclusion to his second post, which comes after his analysis of three options for dealing with the banking system (the original Paulson plan, nationalization, and now the Geithner plan) is especially interesting:
So I am not wedded to a particular plan, I think they all have good and bad points, and that (with the proper tweaks) each could work. Sure, some seem better than others, but none—to me—is so off the mark that I am filled with despair because we are following a particular course of action…
So I am willing to get behind this plan and to try to make it work. It wasn’t my first choice, I still think nationalization is better overall, but I am not one who believes the Geithner plan cannot possibly work. Trying to change it now would delay the plan for too long and more delay is absolutely the wrong step to take. There’s still time for minor changes to improve the program as we go along, and it will be important to implement mid-course corrections, but like it or not this is the plan we are going with and the important thing now is to do the best that we can to try and make it work.
I’m biased in this regard, obviously, because I think the costs of nationalization likely outweigh the benefits, and that in any case it would be very difficult for Obama to get Congress to authorize the trillion dollars or more the government would need to take over America’s biggest banks. And I agree with Thoma that the Geithner plan could work. But what I like best about his conclusion is something else: his implicit recognition that the people who came up with this plan — Geithner, Larry Summers, and Ben Bernanke — are well-versed in the problems of the banking system and serious about trying to solve them, rather than being either oblivious or corrupt. Much of the discourse around the Geithner plan, and around the nationalization debate more generally, seems to assume that Obama’s economic policymakers don’t understand the gravity of the situation or the virtues of nationalization, or else it assumes that they don’t really care about improving the real economy. I’d be very surprised if either of those things was true. The Geithner plan may be a mistake. But if it turns out to be a mistake, it’ll be one because Geithner and Bernanke made an incorrect evaluation on how much the banks’ toxic assets are really worth, and/or because they overestimated how expensive and arduous nationalizing a big bank would be. It won’t be because they didn’t understand the problem.
"But if it turns out to be a mistake, it’ll be one because Geithner and Bernanke made an incorrect evaluation on how much the banks’ toxic assets are really worth, and/or because they overestimated how expensive and arduous nationalizing a big bank would be."
This is not exactly my fear. My fear is a GAO report or study in the future that says that the government's actions led to our overpaying for the assets, at the same time as Pimco, et al, do very well on the plan.
In other words, it isn't a simple matter of numbers. It's also going to be a reckoning of how this crisis was handled. At that point, if the reckoning is very negative to the government in any way, and we haven't addressed the underlying problems to any significant degree, people will demand a much different arrangement of our system. I'm just concerned that, by then, people could actually have given up on even the best parts of our financial system.Posted by: