It’s no fun being a leader in a financial crisis. You’ve got to be bold but reassuring, free-spending but disciplined. You must decisively crush the short-term problem without freaking everybody out and leaving a long-term mess.
To my mind, the stimulus packages on Capitol Hill fail to strike these balances. They are broad but sloppy, too slow to make a quick difference and too enduring to avoid fiscal damage.
But another part of the administration’s economic strategy is being unveiled today by Treasury Secretary Tim Geithner, and at first blush the news is much happier. Geithner’s plan is huge but also disciplined. It’s designed by someone aware of government’s limitations.
Geithner has been working the financial meltdown for a while. The basic lesson he has drawn is that the federal government has been too constrained. Occasionally, policy makers would step on the accelerator and bail out a bank, but then they’d step on the brake, worrying about moral hazard or inflation.
It’s time to be heavier on the accelerator, he says: “It goes against the basic instincts of anybody who is understandably worried about using taxpayer money carefully, about moral hazard, about long-term credibility issues. But if you don’t do it now, the market will know you’re going to have to do it later.”
Some economists leave the impression that the banking sector is a rotting corpse, hopelessly polluted by valueless toxic assets. Geithner takes a different view. He agrees that many bankers did things that are “reprehensible and deeply troubling.” But the big uncertainty is not inside the banks; it’s in the broader economic climate.
“People are enormously uncertain about the depth of the recession,” Geithner says. “They’re enormously uncertain” about how their assets will perform in this environment. But this is not like the savings-and-loan crisis of the ’80s and ’90s, or like Sweden, where banks themselves were dead, he said, adding that we’re trying to repair “a system that is largely alive and will largely survive but is still burdened by systemic market failure, systemic uncertainty.”
Therefore, Geithner argues, the government doesn’t need to go in and nationalize the banks. “It’s very important that we don’t look like there’s any intent of taking over or managing banks. Governments are terrible managers of bad assets. There’s no good history of governments doing that well.”
Nor does government need to lop off the head of every C.E.O. Geithner has forced management changes in the past and says he will do so again, but he clearly leans against those who want a reign of terror.
The key, he says, is to create “massive, sustained and substantial macroeconomic policy” that would pump capital into markets to get them working again. The heart of his program is a series of public-private investment funds with names like the Legacy Asset Partnership Bank and the Consumer and Business Lending Initiative. One would acquire toxic assets. One would foster consumer and small-business lending. “There’s a lot of private capital out there that wants to come in. It just can’t get the financing,” Geithner insists. The new programs would encourage private investors, and then once the markets are unfrozen, would “get out as quickly as possible.”
There had been some talk about setting up an insurance program, with the government guaranteeing a low-end price on toxic assets. But Geithner doesn’t think that can work. “If you’re pricing a guarantee or pricing a purchase, you have the same basic problem: the absence of a market price,” he said. It’s better to create a market so prices can be set normally, not by fiat. You end up with a program that is big but reassuring to markets — more a partnership than a confrontation.
The second balance Geithner has struck is political. The mood in Congress is sour. Members are sickened by how much TARP money has been wasted.
To rebuild goodwill, Geithner’s program is designed to be reasonably simple and transparent. “I was very worried about us looking like we’re vulnerable to the charge that we’re overpaying as a way to provide disguised subsidies to banks.” Moreover, as he puts it, “the simple basic principle is that public assistance is a privilege and not a right and bankers need to understand that it’s not for them.”
As for the eventual costs, they are postponed. “We don’t really know how much more it will take,” he admits. But if the Treasury Department can build credibility, then it will be easier to make the case for those hundreds of billions later.
The whole policy is still unfolding. But one gets the sense that it is being designed to fit the crisis, not a prefab agenda. Geithner is proposing a huge intervention, but at least he seems to be running against his natural instincts. If we’re going to have a finance czar, he should at least dislike the role.