Secretary Tim Geithner announced today the long-awaited details on the financial repair plan that he promised on February 10. Some reactions have been negative, both from the left and the right. Paul Krugman, for example, argues that the plan does not go far enough in forcing banks to recognize the fallen value of their assets.
But the stock market was “dazzled” by Geithner’s explanation of the PPIP proposal, with prices up strongly. The plan has no shortage of defenders. Brad DeLong makes some good points, and responds to Krugman. The Geithner Plan is an improvement over the Paulson plan in that when “toxic assets,” now called “legacy assets,” are bought from the banks, their prices are set by private bidding (from hedge funds and private equity companies), rather than by an overworked Treasury official pulling a number out of the air and risking that the taxpayer grossly overpays for the assets. On similar grounds, Nouriel Roubini has surprised the cynics by giving (qualified) support for the plan, and points out that its design appears to follow a recent proposal by my Harvard colleage Lucien Bebchuk.
Joe Stiglitz, who attacks the Administration’s proposal, offhandedly mentions “It has allowed the administration to avoid going back to Congress” to ask for more money “and it provided a way to avoid nationalization,” as if these were not key advantages for those who have to work in the real political world. It is true that we might end up with some form of temporary bank nationalization before we are done. And it is also true that the lesson from Roosevelt’s strategy in 1933, from the slower response to the Saving and Loan problems in the late 1980s, and from Japan’s much more delayed response to its banking disaster of the 1990s, is that biting the bullet early saves even greater expense later. But as Alan Blinder says, it matters which bullet you bite. He points out some neglected counter-arguments to the nationalization strategy that is newly beloved of academic critics. It would be hard to enforce a clear drawing of the line as to which banks would be taken over. Furthermore — even with the necessary wiping out of bank shareholders — (i) the word “nationalization” would likely violate a political constraint, while (ii) making good on the banks’ outstanding obligations would likely violate the government’s budget constraint.
My feeling is: the Geithner plan deserves to be given a chance. I discussed it on NPR’s On Point this morning. Some of the callers evinced the anger that the American public understandably feels against the financial sector and the understandable pain of the recession. I made an analogy with 9/11/01, when understandable anger and pain led the American public to support presidential policies that made things worse rather then better — the invasion of an irrelevant country, plus big tax cuts for the rich — consequences that we are still living with today. In the current crisis,it is important that the anger be channeled in directions that will make things better rather than worse.
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