by ensuring “the stability of the payment system and to safeguard the supply of credit.”

TO BE NOTED: From The New Yorker:

"The Sweden Example

Ryan Avent beats me to the punch by pointing out the most important part of today’s Times’ story on Tim Geithner, namely that in the summer of 2008, after the collapse of Bear Stearns but before the meltdown of Lehman Brothers, Geithner proposed having the government guarantee the debts of all U.S. banks. The plan was shot down as politically untenable, but, as Ryan points out, had it been put into effect, we would most likely not have seen Lehman go under or had to deal with the incredibly negative consequences of that failure. More important, perhaps, by reducing the threat of panicked runs on bank debt (since those debts would have been guaranteed), such a guarantee would also have made it easier for regulators and banks to deal in a transparent fashion with the toxic-asset problem. That’s why the very first step in Sweden’s much-admired solution to its banking crisis in the early nineteen-nineties, was, yes, a guarantee of all bank debt. As one of the regulators involved in that effort put it, the guarantee “was provided in order to restore confidence and to ease the immediate pressure on banks,” by ensuring “the stability of the payment system and to safeguard the supply of credit.”

Given all this, Ryan is perplexed that Yves Smith, in her post today on the Times article, dismisses Geithner’s proposal as just another attempt to give Wall Street a handout. In part, this could be because Smith thinks that, in the absence of a systematic plan to deal with toxic assets (which we don’t know if Geithner had), guaranteeing all bank debt would have allowed banks to engage in more risky behavior, knowing that taxpayers would foot the bill. But I think what’s really driving Smith’s attack on Geithner’s proposal is her conviction that any plan to deal with the banking system has to require bank bondholders to take a major hit. In other words, for Smith, the Swedish solution is not the right one. Nationalizing the banks, and wiping out the shareholders, isn’t enough: you have to impose significant pain on the banks’ debtholders, too.

Lots of nationalization advocates believe that a debt guarantee is a bad idea. But one of the things that’s made the debate over nationalization confusing is that many of these same people, while arguing that bank debtholders should take a hit, also say that what the U.S. should do is emulate Sweden. Henry Blodget, for instance, has argued that that we should follow “a tried and true way of fixing banks: The Swedish Model,” and yet he also insists that we should stop bailing out bank bondholders. And Barry Ritholtz has written that when it comes to dealing with the banks we should “Go Swedish. Wipe out shareholders, bond holders, and all the bad debt and junk paper these firms hold.”

Needless to say, this doesn’t make any sense. At the heart of the Swedish solution was the guarantee of all bank debt, ensuring that bondholders would not take a hit. And the Swedes, at least, thought that guarantee was essential to making their plan work. In the U.S. context, maybe we should follow a different approach, but nationalization supporters should be clear: if they want to cram down the debtholders, then they don’t want the U.S. to follow the Swedish model. You cannot “Go Swedish” and “wipe out bond holders” at the same time.

There are nationalization advocates who really do want the U.S. to emulate Sweden, including most notably Paul Krugman, who’s said, “Sweden guaranteed all [bank liabilities]. If forced to say, I would go the Swedish route; but of course we can’t do that unless we’re prepared to put all troubled banks in receivership.” But many supporters of nationalization are just invoking Sweden in order to prove that there’s a historical precedent for successful nationalization, while at the same time arguing that the U.S. should reject a crucial part of what made that precedent work. So the news that Geithner wanted the U.S. to take a first step on the Swedish path is unlikely to change their view of him. If anything, it’ll just confirm their assumption that he’s not willing to do what’s necessary.

Posted by James Surowiecki"

And:

April 27, 2009

The Fetishization of Boldness

Justin Fox has a nice post laying out a range of possible explanations for the Obama Administration’s decision not to nationalize some of the country’s biggest banks. Sensibly, the very first explanation Fox offers (and one he says he’s finding more plausible) is that the Administration is following its current strategy for dealing with the banks (a mix of regulatory forbearance and government subsidy in the form of debt guarantees and capital injections) because it believes “it’s the proper course of action, because most banks will be able to earn their way out of their problems if given some time and forbearance by regulators.” Oddly, this simple explanation—that Barack Obama, Tim Geithner, and Ben Bernanke have adopted their strategy because they think it has the best chance of getting the economy back on track while taking the least systemic risk, rather than because they’re stupid, or corrupt, or “cognitively captured”—is one you rarely hear floated these days, even though it is, I think, almost certainly true.

At the same time, Fox echoes one of the most common, but least convincing, criticisms of the Administration’s approach in general, and of Tim Geithner in particular, namely that they’re handling the crisis in a “tentative way” and not being bold enough. This critique has become a commonplace—it’s at the heart of Gary Weiss’s piece on Geithner in the new issue of Portfolio, where Geithner is described as “tentative,” “lacking in boldness and imagination,” and lacking “fresh ideas.”

I don’t buy it. Geithner did flub his first big speech, when he gave markets only a tentative sketch of what the Administration’s bank plan would look like. But from a policy perspective, the Administration has not been tentative at all: in fact, it’s been unwavering in its insistence that, given current market and economic conditions, the risks and costs of nationalization outweigh the benefits. And its alternative strategy may be wrong, but that doesn't mean it’s ill-considered, or halfhearted.

It's true that the administration's approach may not be bold in the sense of being radical, but no one believes that boldness is, in itself, a good thing or that the more radical a solution is, the better it must be. (The Bush Administration’s decision to invade Iraq was certainly bold and radical. That didn’t make it any less of a mistake.) More important, the boldness issue is really a red herring. Obama’s critics’ problem with the Administration isn’t really that they think it should act more decisively: it’s that they think the Administration should act differently. In that context, the personal attacks on Geithner for being weak and hesitant (like the persistent references to him as “Timmy,” as if he were somehow a child) are really just rhetorical gambits designed to make the Administration’s strategy seem weak and hesitant as well. The myriad criticisms of Geithner’s style and connections and the Administration’s lack of imagination all really boil down to the same unvarying argument: the government should nationalize the banks. And as long as the Administration refrains from doing this, nothing it does on the banking front—either stylistically or in terms of policy—will satisfy its critics.

Keywords

• Justin Fox;
• Obama administration;
• Tim Geithner;
• Treasury;
• banking crisis;
• banking system

Posted by James Surowiecki"