I don't think he did well yesterday. I don't know that he's the right guy for the job. But what I do know is the following:
1. Nobody, absolutely nobody, has more incentive to get this right than the Obama Administration. If the economy collapses -- well, more than it already has collapsed -- then the Democrats get slaughtered in 2010, Obama is a one-termer, health care doesn't happen, the poverty rate increases by a couple orders of magnitude, and the imperative to fix the environment gets put on the backburner. To suggest that Obama or Geithner are tools of Wall Street and are looking out for something other than the country's best interest is freaking asinine. Maybe their ideas are wrong -- but their hearts are in the right place.
2. If the banks fail, then rich people lose a lot of money, and poor people lose a lot of jobs (and also much of what money they have). But I swear to God, there's a lunatic fringe out there that would take this trade and call it "progress".
2a. At the end of the day, a great deal of the debate between liberals and conservatives is about how to apportion wealth. It seems so banal to talk about it that way, and so we put all sorts of window dressing on it, but that's really what it's all about. But on this issue of the banking crisis -- and to a lesser extent this was true of the stimulus -- there is a much larger delta on the aggregate amount of wealth that the United States stands to gain (or lose) than on how that wealth is distributed. Over the next 6-18 months, the outcomes for everyone from the top of the economic ladder to the bottom rung are very strongly correlated.
3. I'm sorry, but somewhere between 99.9% and 99.999999% of us are severely underqualified to be making policy recommendations on this particular issue. And I'm certainly in the majority on this one. My anecdotal experience for the past several months has been that the more someone knows about the economy, the more they know (or at least are willing to admit to) what they don't know. Anyone who is professing with certainty that this or that will work -- nationalizing the banks, for instance -- is an idiot.
4. So if I'm telling you to lay off the ideological smelling salts (not that you will) and that your ideas on policy are probably not contributing very much to the discussion (don't worry -- neither are mine) then what, exactly, do I want you to do?
What I'm asking you to do is to clear the playing field. This is neither the time nor the place for mass movements -- this is the time for expert opinion. Once the experts (and I'm not one of them) have reached some kind of a consensus about what the best course of action is (and they haven't yet), then figure out who is impeding that action for political or other disingenuous reasons and tackle them -- do whatever you can to remove them from the playing field. But we're not at that stage yet.
2.11.2009
Give Geithner a Break
@ 11:48 AM
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First!
How profoundly wrong are you to state that it is government's job to apportion wealth. Only in a warped socialist mind do we think it is government's job to play robinhood. Never in the history of the world has any government been shown to be a better allocater of resources than the private market. I guess that your type of mindset is what is taught by the marxist professors in acedemia today. Keep up this policy path and their will be a revolution.
I agree that the vast majority of people have no idea what needs to be done, but how do you recognize who the experts are? Is it even possible? I doubt Obama is an expert (on the economy), but how would he go about recognizing which of the many so called 'economic experts' actually know what they're talking about?
Great post Nate! Keep the fires burning...
Sorry about that. But I've never had the chance before.
Anyway, reframing it as apportioning the wealth is pretty accurate—a favorite quote all through my college years was that Politics is simply the allocation of limited resources.
But, given the obstructionist bullshit from the three "centrist" Republican senators, I don't think that you necessarily need to be an economic wizard to divine thems that's sticking up for the little guy and thems that's sticking up for the wealthy. While the fortunes of the rich and poor are closely correlated, that doesn't mean that the relative impacts are equal—the top 1% of wealth could lose 99% of their assets and still not be in the lowest quintile of Americans.
And frankly, I don't mind a little demagoguery in the service of a good cause.
Jack-be-nimble, you are quite wrong sir ... it is the private market's job to CREATE wealth, not apportion it. Governments -- capitalist, socialist and communist -- have been in the business of apportioning wealth since the beginning of governance, and they shall forever be ...
Nate, good post and I agree wholeheartedly.
1-Nationalize Banks
2- 2 years Moratorium on foreclosure
3- Universal Healthcare
Excellent post, Nate. Not that it will get people to shut up.
Jack-be-nimble, you missed the point. Reapportioning wealth isn't just about redistributing money. Building a road is reapportioning wealth. Your use of the road is not restricted to the percentage of the total cost you covered. The private market would not be awesome at building the interstate highway system - there's just too much coordiantion involved.
Thanks Nate, for once again bringing sanity to the issue and reminding me that not everyone on the left clings to ideology as the right does to theirs.
I'm Curious what you make of Nouriel Rabini's call to nationalize the banks:
http://www.rgemonitor.com/roubini-monitor/255507/it_is_time_to_nationalize_insolvent_banking_systems
Josh,
I think there's a big difference between the stimulus and the banking thing. The economics of the stimulus should be well enough within the comprehension of, say, a BA-level economist (or just someone who's an overall swell guy and reads a lot) that I think we can have a relatively constructive debate about it. The bailout, on the other hand, is more of a PhD-level discussion, IMO.
Nate, I agree with your analysis in theory... but I also agree with Jeffrey's post above. How do we know who the experts are? I can point to people with the best educational background and industry experience with equally great reputations that come across as partisan quacks in the field of economics.
How do we identify to whom we should listen?
A nice piece over on the wsj from a pair of folks who actually are qualified to talk about policy, and who are appropriately ambivilent about how to approach the issue.
http://online.wsj.com/article/SB123423402552366409.html
I agree with most of what you wrote. However, it seems that most of the Economists who have been RIGHT over the past few years have reached a consensus - nationalization of the banks. I'd refer you to the less lunatic part of the Daily Kos: http://www.dailykos.com/storyonly/2009/2/9/14316/26025
The problem is that there seems to be another group of experts (Geithner, Summers) who are against this option, and are tying themselves in knots trying to come up with a different solution. But they haven't made any economic arguments, at least in public, about what's wrong with nationalization. Ideological arguments, I suppose, but not economic ones.
No doubt there is a lunatic fringe .
Here's the deal Nate and you can dispute this if you want.
The experts got us here and without safeguards in place, they'll do it again, and again, and again, and again.
People have every reason to be skeptical with the roller coaster ride they are dragged through. If we had a financial guy in charge that could hit the right tone like Obama does, then people would be much more settled.
Here's my question for Geithner and gang. Obama, came to the office with a plan. He's thought about his position a lot. Sure, some of these individuals may have been blindsided by being asked to steer us out of this mess but I'm wondering, if they didn't have a good plan to get us out of this mess, why would they take the job?
I suppose though I do understand where Geithner is coming from in not wanting to release partially created plans that may change. I'm sure he is aware, especially after yesterday, anything he says, will be quickly absorbed into the markets.
I also understand he has to carefully tread between regulation that will work but at the same time, not freak these investors out of the markets for some time to come.
He's been served a bit ol' turd sandwich by Bush and Co. and I think it's gotten a little stale to boot.
Nate, to me it just seems immoral to give money to those who are already wealthy when the stakes are so much higher for everybody else. Wall Street doesn't understand that--the NY Times reports that one bank's bonuses could have given $91K to every employee but were instead apportioned to a relative few--and neither do a lot of our elected representatives (who wouldn't be able to campaign without significant amounts of dough). But they need to understand this. The reason one major banker was just now able to say that he would accept a $1 salary until further notice is that he has *plenty* of money to live on already. How many Americans do you know who would be able to live on a $1 salary? And how many middle-class salaries could be paid on even one of these bankers' typical incomes? How can companies cut even one job when they are paying their executives the equivalent of three hundred of them?
I don't claim to be an expert. But I've just spent the last couple of decades disagreeing with the best & brightest 'experts' who were telling us that banking and investment deregulation were what all the kool kidz were needing now, what with our new-fangled economy and whatnot.
And you know who was wrong? The Rubins. The Greenspans. The Gramms. The Clintons. And so on and so forth.
And you know who was right?
Me.
So, I'm sorry, the cult of the expert in such bullshit, ideologically-run fields as economics just simply does not cut it any more.
If a plan sounds fishy and doesn't sound reasonable, I'm sorry, the excuse that 'well, you ain't an expert' is not enough to convince me otherwise.
Maybe I'm wrong. But I'm not going to conclude so on the bullshit basis that 'these guys are experts' anymore.
Vince,
What I *think* I know is that the "correct" solution depends to a large extent on whether the banks are solvent or not, the argument for nationalization becoming much stronger if the banks are in fact insolvent. Roubini is convinced that some of the banks are insolvent (or will inevitably become that way if they aren't yet) and that's guiding his policy recommendations. He may be right about this -- but I don't think that Treasury is ready to come to a conclusion yet. This may be the purpose of Geithner's "stress test". To the extent I have any inkling about the proper course of action right now, it's that we should use whatever tools are at our disposal to ensure that Treasury gets an honest look at the condition of the banks (i.e. sees their books) and then can pick an appropriate course of action in response.
The reason the market tanked yesterday after Geithner spoke is simple: Bank shareholders wanted a taxpayer-funded handout, as they had grown accustomed to receiving from the Bush administration.
Geithner failed to offer up the taxpayers' billions for nothing.
Shareholders were disappointed they weren't given a free handout, so they sold.
Nice thought but it would be fracking impossible to convince even a fraction of Americans to shut up and listen to experts. I used the word frack because it comes from Battlestar Galactica. While Americans aren't faced with near certain annihilation from a synthetic race, Cylons, we do share the Colonials' nihilistic penchant for mutual destruction. In the face of certain economic catastrophe, a majority of republicans, many journalists, some pundits...would rather bank on the bailout's failure.
This is neither the time nor the place for mass movements -- this is the time for expert opinion. Once the experts (and I'm not one of them) have reached some kind of a consensus about what the best course of action is (and they haven't yet), then figure out who is impeding that action for political or other disingenuous reasons and tackle them -- do whatever you can to remove them from the playing field.
This is surely the most anti-democratic sentiment that has ever been expressed at this site. Here's why I disagree with it: you're acting as if the "experts" are totally uninfluenced by ideology - as if they are just competent technocrats trying to solve a problem. But they are not operating in an ideological vacuum. People like Geithner and Larry Summers, and arguably Obama himself, have argued against nationalization of the banks, for instance, simply on the grounds that we are a free-market economy, and we prefer free-market solutions. This is where a "mass movement" can be useful - in exerting ideological pressure on people in the government, to force them to accept other conceivable paths towards solving the economic crisis. Nationalization may or may not be the best solution, but it won't even be considered without some public pressure pushing back against the technocrats' inherent ideological bias. Of course, once nationalization is on the table, then we can leave it up to them to figure out the best way to go about it. I mean, I'm not going to write a letter to Geithner arguing for a particular repayment schedule for bad bank loans or whatever. But to act as if the people in the Obama administration are simply trying to solve a technical problem, without their approach to that problem being couched in a certain ideological perspective, seems utterly naive. And once you acknowledge that ideology determines decision-making to some extent, then you have to acknowledge the necessity of exerting public pressure to try to combat that ideological bias, wherever that bias runs counter to the interests of the people.
Nate,
I thought that this was an excellent post. You distilled everything perfectly, with equal parts reason and passion for getting this debate right. If only politicians would -- like you -- stop pretending that they know with certainty what course of action is correct, we'd probably all be able to have a much more civilized (and more importantly, fruitful) debate.
A max of 99.999999% would seem to imply that there are at least three Americans who are qualified to analyze this situation and make intelligent decisions.
I'm not sure I buy that.
Great post, Nate!
Don't get exasperated by the loonies out there trying to weigh in on the debate. I like to think that the majority of us know enough to know that we don't know enough...
-Tyler-
Your idea that private enterprise cannot coordinate massive logistics is ridiculous. Go into a walmart or seven-eleven and look at all the cheap Chinese plastic shit. The distribution chain required is baffling. Look at the inter-connectedness of the internet or the strawberries from Peru. Free enterprise is profoundly better at organizing and coordinating. Lets look at some of governments wonderful coordinated efforts: DMV, SEC, Social Security, $300 hammers in the army, food stamps. I personally have never been in contact with any government worker short of incompetent and bordering on willfully negligent. But better yet ask yourself the question of ethics. Is this ethical? The government is nationalizing risk and failure, not success. The assets that are worthless will be taken as a loss by all the people instead of those who purchased them. It is equivalent to paying platinum prices for dog shit, then telling the government to knowingly buy your dog shit at platinum prices so you don't take a loss. It is lawful stealing from those who saved money instead of speculating it and squandering it. Obama talked a mean game about personal responsibility of fathers and the like during the campaign but now there will be no personal responsibility, just personal gain. And if you follow the money it doesn't lead to you and me, it leads to millionaire bankers and brokerages. O, and by the way. Does the gov. have some special reserve of wealth its been sitting on that it can not use? Or is it going to have to pull all of this from the free-market?
Nate,
Fantastic post. Hopefully cooler heads will prevail.
JBN,
I challenge you to make a thoughtful post that does not include the words "socialist" "marxist", "revolt", or "revolution". (or any derivative thereof) I honestly don't think you can do it.
"People like Geithner and Larry Summers, and arguably Obama himself, have argued against nationalization of the banks, for instance, simply on the grounds that we are a free-market economy, and we prefer free-market solutions."
It also depends on your definition of 'nationalize'.
If Bank of America is declared insolvent, seized, and its assets sold off by the FDIC, is that 'nationalization'?
Well, here's the Catch-22
Let's say they do an FDR-style Bank Holiday-close the banks, send inspectors in to determine whose holding toxic CDOs and set a dollar value for these assets-and in some cases, set the value to $0-allow the banks to reopen that are sound and the ones that aren't to fold. If they want a bailout, the government gets controlling stock, so they can correct bad behavior from the boardroom level. Taxpayers get a dividend when/if the profits resume. This is also what Japan had to do in 2001 to break their decade long recession. Sweden did it in the early 90's too. England is sort of doing it with some of their banks now.
The short term effect will be a deepening of the financial crisis. It will end the crisis more quickly than it would have taken otherwise-the Japanese crisis went on for a decade before they intervened, and who knows if it ever would have ended if they'd hadn't. Still, the short term downturn would probably last longer than 2 years-which means November 2010 is gonna suck for the Democrats, and the GOp might even be able to claim victory when the economy gets rolling again shortly after they assume office, even though the real work will have been done already by the time they get into office.
The stimulus is a delaying tactic-it kicks the can down the road a bit, perhaps to 2012. Once Obama is a lame duck, he can do the nasty ugly things to the banks that have to be done-and endure the economic downturn that will result between 2012 and 2014. With a Democratic majority in power at least until 2014, he can correct alot of other fundamental problems this country is facing-like infrastructure,the Wars, the environment and civil rights-and these will probably be enough to ensure him lasting political legacy that will long survive the memories of the recession.
The downside to all this? It means we have to wait until 2014 before anybody starts turning serious profits again.And we'll have to spend out asses off ona federal level just to create enough jobs for people to survive the recession until things perk up in 2014.
Nate,
Honestly, when Tim G. talks about using trillions to make these banks solvent that doesn't scare the hell out of you? It says that this is easily the largest collapse in history. So let the banks collapse, its their own fault anyways (and the fed). But why fuck everyone with inflating the dollar trillions of dollars a month? Inflation is not rising prices. Inflation is increase in money supply. Translate what Tim G. is saying. We will stop this problem by inflating the money and giving trillions to the banks. Is there any reason the banks earned this money or deserve it? Even the speculative home buyers don't deserve it. They deserve to fail. But inflation hits everyone with dollars. Grandmas and grandpas that lived through the depression and saved money for a rainy day, they are the ones that will be hit by this. In my opinion that is just fucked up!
Russo, if any more major banks fail, the dollar will be useless whether it's inflated or not. People don't realize how intertwined this world is...
Nate,
Clive Crook over at the Atlantic is feeling the same, but from a slightly different angle:
http://clivecrook.theatlantic.com/archives/2009/02/dismal_science_revisited.php
The post is a plea to economic "experts" to cease degrading the quality of the debate with their own political biases. I agree with him - it's not all our fault that we can't figure out who to trust.
@Jack be nimble.
Any time you tax you are re-apportioning wealth. Are you saying that the government should not tax at all, and then not have the money to fund a police force, or roads, or public transportation, or fight wars to protect our people?
oh, and take a look around you, our markets have done so well recently haven't they.
Your thesis is a good one, Nate. Unfortunately, there's some good evidence that Americans tend to place undue evidence on "decisiveness" as a leadership trait. We want to be told there's a man with a plan.
The smartest, most thoughtful people I know are generally the least decisive, because they can see more options and pitfalls. The really good leaders are the ones who listen to as much information as possible, take action in response to it but recognize that there's a good chance they either won't succeed or that success will have little or nothing to do with their choices. Intriguingly, really bad leaders also get lucky from time to time by just plunging ahead, so it makes you wonder if at some point you should just get it down to a set of relatively closely weighted options and flip a coin.
I do agree that the finer points of the most effective form of stimulus will require a lot of deep examination by people who know a hell of a lot more than I do. But I don't consider all the posturing that's going on on the Hill, including by our glorious senators Susan and Olympia, to be "deep examination."
But I'm also inclined to agree with Chachy that the administration's array of choices is currently restricted by ideological factors (as is always the case), and I agree that our ideology should be and is up for debate. The fact that "we haven't done it that way before" or "that's not the system we have here" is no longer a valid reason, not in the midst of this crisis.
And, Jack-be-nimble aside, I'm extraordinarily glad that we live in a time where making statements about how it's acceptable to challenge the economic orthodoxy won't get me called in front of HUAC.
The attitude that animates this post is profoundly wrongheaded. Rule by a technocratic elite of "experts" is attractive in theory, but is the most naive and idealistic cloud-cuckooland theory of them all in reality. The notion that the role of the public in debates concerning the dispositions of hundreds of billions of dollars, affecting the course of the economy they work and live in, is to sit quietly and wait for the ruling from on high is ludicrous. The idea that the experts will dispassionately come to the "correct" conclusions, unshaken by personal upbringing and outlook or swayed by pressure from interested parties is so naive it astounds me. And, as has been pointed out above, there is a profound distrust of democracy at the heart of this attitude-the masses cannot be trusted to know what is best for them.
There's nothing wrong with asking people to be informed about the issues, or to give due consideration to the opinions of experts. But the idea that we should sit down and shut up-and that's a line the post crosses-is just wrong.
"At the end of the day, a great deal of the debate between liberals and conservatives is about how to apportion wealth."
These are clearly the words of someone who just doesn't understand the other side in this particular debate. It's not a debate over how to apportion wealth . . . it's a debate over whether to apportion it at all, or whether to let those responsible for creating that wealth apportion their own chunks of it themselves.
That's the problem with your entire analysis here. You assert that this is the moment of the "experts" . . . but then you acknowledge that even those so-called experts have been very clear on the fact that they don't have the first clue what they're mucking around with. A national economy - let alone the largest, most globally influential economy in recorded history - is too complex for anybody to understand, let alone control. Even the experts are saying as much.
So you're dead wrong that the vast majority of us are underqualified to make judgments about this . . . we're all equally qualified to make the judgment that the porkers in Congress (Repub, Dem or otherwise) should keep their hands out of our pockets and quit throwing our money down the toilet. After all . . . if you must have an expert opinion, it's the experts in the Congressional Budget Office who say that the results of this whole mess are going to be worse than doing nothing at all.
Parsaion,
The role of government, obviously, should be to protect freedom and rights. That means judges, courts, police, an army in times of need... It does not include necessarily schools, roads etc. otherwise it would say that in the constitution! Public schools are disaster and in many places they cost more than private schools. Open the money to vouchers and see how many people stay in public schools. Gov is inefficient so as much as possible outside of protection of rights should be left to the free market in order to serve the greatest good to the greatest number of people.
Unfortunately, the banks have to be saved, or else a bunch of innocent people get screwed.
My suggestion is: Buy up the banks' bad assets and let them retire their debt. Okay. The condition is that their top executives have to resign and take a severance package of no more than $2 million to be paid out over a period of, say, five years. The upshot is that they get immunity, but if they don't take the deal, they'll be open to suits from shareholders and customers.
Leaving the same corrupt maniacs that ran their companies into the ground in charge and giving them more money to squander or embezzle seems like an inherently flawed strategy. I don't know why forcing executives out of bailed-out corporations seemingly isn't something that's on the table. Frankly, a couple million severance plus legal immunity is better than some of those monkeys deserve.
Oh yeah, and Barney Frank should be investigated and tried.
Nate -
I profoundly disagree with this -
If the economy collapses -- well, more than it already has collapsed -- then the Democrats get slaughtered in 2010, Obama is a one-termer, health care doesn't happen, the poverty rate increases by a couple orders of magnitude, and the imperative to fix the environment gets put on the backburner.
Of course I don't want the economy to collapse, but WHY SHOULD REPUBLICANS BE THE "DEFAULT"?
They made the mess. Why on earth should we assume that they will be automatically voted back in if the mess can't be fixed in a certain time period?
This is the Republican media's assumption - Everyone Must Always Vote Republican, unless the Demcrats are perfect in every possible way. Why should you buy into it?
"I went to a doctor for treatment, and he poisoned me with arsenic. I got much sicker, so I went to another doctor who tried to treat the poisoning. But the second doctor didn't pull off an instant miraculous cure, so I went back to the first doctor for more arsenic".
Is that logical?
Nate
I would disagree about ONE point of the Banking Bailout. While I only possess a B.S. of Economics, I quite accurately recall the most important lessons of the Great Depression.
Secretary Geithner is not pushing appropriate regulation of the Banking Industry. In fact, from what I have read, he is actively resisting other voices in the administration on this subject. He is being heckled on this subject (among many) by Paul Krugman, Nobel Laureate in Economics.
Human nature being what it is, when people are left to their own devices, a lot of people will try to get away with things that might not be correct. Strict banking regulations from the 1930s were part of the economic recovery and the flattening of the boom-bust cycle. When Savings and Loan regulations were eased or not enforced, banks made bad loans. When mortgage-based derivatives were created and not effectively regulated, there was increased demand which led to loose lending, such as NINJA loans. (No Income, No Job Applicant).
To relate it to sports, can you believe that baseball players took steroids? That when they get caught, they say they are no longer used banned substances. Funny how A-Rod admitted to the period BEFORE penalties were enforced as the only time he did it. How many players are using agents that cannot be tested?
Can I calculate what the 10-year effect of a 0.5% increase in Prime Rate would be? Do I know the downstream effects of letting Bank A fail and Bank B survive? I do not.
I do know this. Give corporate bankers a ton of "free" government money without strict regulation of how to use it, and they will do what is best FOR THEM. Otherwise, NY AG Cuomo would be only worrying about indicting some mafioso. The market will correct for bad loans and bubbles. However, the market can be quite harsh to the average person.
The whole problem, Ian, as I think nate and I see, is that anyone in the public making valid critiques are being drowned out by the vast, vast majority who are preaching ideaology, not practical information., and adding nothing but confusion to the actual solutions. I'll remind you if it wasn't for idealogy, the government would have pulled its head out of its rear and not allowed it to get to this point. Back before unemployment rose, there were many people who could have been restructured by government into mortgages that wouldn't have tanked the economy nor taken down 3 of the top 15 financial firms in this country, causing banks not to lend to each other, spiralling this out of control. it was a simple set of issues that could have been handled if we weren't hand tied by rigid idealogy, and it's sad. heck, there's still a bunch of lunatics who are saying to stay out completely and let it happen, which is insanity. just let the bad ones fail...brilliant, and then when they fail, the good ones hold all that debt they had bought previously from the bad ones, which is now worthless, and they fail anyways...
I agree with your general point Nate. But then again, I would say one of the .000001% of people who are highly qualified to talk about the situation is Paul Krugman. When he forcefully advocates a position on financial markets, I listen.
Nate:
While I agree with much of what you say, I have to throw this monkey-wrench into your machinery:
Aren't the 'experts' you ask us to abide the VERY SAME GROUP that not only got us into this mess in the first place - but failed to see it coming as well?
Just askiing.....
Nate - thank you, this needed to be said.
NoVa Commie - I agree with you that some economists- especially public sphere ones- inject their personal biases into their projections. But lets not play Crook up - he fell to the same trap in his article. His attack on Krugman was so off base that its hard not to conclude he was stretching because he wanted to include a prominent liberal.
(If you read Krugman's article, nothing Crook criticizes him for is actually controversial within the economic community. Free trade is generally good. Positive externalities tend to be underproduced. Recapturing positive externalities will increase production. And in the part that is subject to debate, Krugman certainly isn't taking the iconic progressive stand. (The value of protecting globalization is higher than the value of recapturing the positive externalities.)
The only way that's outside the consensus is if you stereotype economics as being theocratically pro-free trade instead of being about models.
Good advice. It's pretty fucking tired when everyone on either side of the aisle is using something like this push their ideology or pet projects. "See! This is what happens when you _____!"
Telling everyone to STFU isn't popular, but sometimes we need to hear it.
So... basically the 5th District of Illinois needs to elect Charlie Wheelan? Could agree more.
www.wheelanforcongress.com
If the poverty rate jumped a couple orders of magnitude, wouldn't it be >100%?
I couldn't agree more that now is the time for experts instead of partisan bickering. That's why I'm excited about Charlie Wheelan's candidacy for Rahm Emanuel's former seat. He's actually written a book on economics and knows what it will take to get us back on track.
Great point about the progressives wanting this all to fail... these nut jobs seem to think that 6th century France was the greatest period in world history because everyone was poor and starving. I don't think they understand how economics and banks work... so sad. The HuffPost crowd isn't too much different. I read somewhere something about "New Banks" on the site last week and couldn't help but laugh. What is a new bank?
Gaylthacan,
Two issues.
First, many of the experts did see this coming - I'm thinking in particular of Joe Stiglitz.
Second, only some of the experts got us into this mess. What is lost on many people is that while there was some dumb deregulation/failure to regulate - I'm thinking of prohibiting the states from regulating derivatives, for instance- some of the deregulatory laws actually helped. For instance, the investment houses that merged with consumer banks after that became legal were the ones that survived, because they were better diversified when their investment assets became nothing.
Jack-Be-Quick,
Considering how a largely unfettered market allocated billions of dollars in bonuses to people who nearly ruined the entire economy and leveraged their companies to the point where the failure of a single asset class could destroy them, now is probably not the best time to argue about how wonderful the market is as a tool of allocating value on nation-wide scales.
WV: unwory - what I wish I could do about the economy right now.
@russo
and to do those things you mentioned first, it still requires re-apportioning wealth, which is basically what taxing does.
Tell me another way that we would have an interstate highway system without help from the Federal Government?
And as far as public vs private school? Not only is having only private or charter schools not letting everyone have access (though underfunding our public school, as is the case in DC seems to have the same outcome), it has been proven that when a child graduates public school, and a child graduates private school, they both have roughly the same knowledge.
But again, I agree, the government is inefficient, but only when you don't compare it to the private person or the small companies. No private business would be able to provide food stamps. No private business would be able to build interstate highways. No private business would be able to provide free schools.
Let us, as you say, let everything up to the free markets and see how we do. Obviously, leaving things in the free markets have proven useful recently. Everyone's blind faith in the free markets has all but destroyed our economy...
or maybe I'm reading my news wrong.
Nate:
While I agree with much of what you say, I have to throw this monkey-wrench into your machinery:
Aren't the 'experts' you ask us to abide the VERY SAME GROUP that not only got us into this mess in the first place - but failed to see it coming as well?
Just askiing.....
February 11, 2009 12:07 PM
Blogger Ezzie said...
Nate - thank you, this needed to be said.
NoVa Commie - I agree with you that some economists- especially public sphere ones- inject their personal biases into their projections. But lets not play Crook up - he fell to the same trap in his article. His attack on Krugman was so off base that its hard not to conclude he was stretching because he wanted to include a prominent liberal.
Certainly. I rarely read Crook for that very reason. That said, he has a valid point in spite of himself. Even Krugman would be more helpful if he'd tone down the emotion and simply spend a few more column centimeters spelling out why the "crazy 36" are, indeed, nuts.
Case in point, Obama at the press conference. He will *never* call the House Republicans a bunch of fruitcakes, because it doesn't add anything substantive to the debate.
There's plenty of sloppy thinking and written argument in the general public on both sides (even the side that happens to be right this time). I think we'd do well to ask - demand - that all experts set a better example than many have to date
I think we should ask this guy what he thinks of Geither's proposal and what we should do with the rest of the bail out money.
Geither's dog has got to be named Lassie- The man looks like a boy scout. Let's hope he is prepared and honest! (but NOT homophobic!)
1. The main goal is bringing confidence back into the financial system.
2. We have some time to accomplish this.
3. We have a smart President who deserves a chance to figure this out and then take his shot.
4. WHO CARES that the stock market dropped a few hundred points? Who thinks Wall Street has a CLUE about how to get out of this mess?
5. The Republicans are shamelessly trying to use this crisis to their own political advantage.
6. We've picked our leader. That leaves us two choices:
A. Follow
B. Get out of the way
End of line
what's asinine is suggesting that politicians 'mean well' even when they take actions which are clearly contrary to this sentiment for the vast majority of Americans. it's as if i didn't hear obama say yesterday that he 'inherited' all sorts of problems. it's as if the author doesn't want to believe that rich people actually do exist, that corporations rule our world, that obama is not actually a god.
get a grip, man. this is reality. you don't have like it, agree with it, or condone it -- but you do have to deal with it. obama and his crew are not magically freed from the requirements of being responsive to their financial backers just because you wish that to be the case.
Nate,
You seem to be implying that the Obama team will do anything in their power to combat the current economic crisis. What you fail to point out, however, is that Obama will only do what he believes is politically viable, and total nationalization of the banks is not, or at least he believes it is not.
O has virtually nothing to gain, politically, from solving this the right (painful) way. Procrastination and obfuscation are both in his best, political, interest.
There is also the problem of expert's ideological and social allegiances and biases.
That being said, it would be awfully nice if we figure out a way to fix this, and then actually do so.
Unfortunately you are reading it wrong but admittedly by no fault of your own. To look at a different perceptive watch this http://video.google.com/videoplay?docid=-8327695139643041382&ei=lP6SSeDKNp2wqAOPjMjGDA&q=ron+paul&hl=en&emb=1
The truth of the matter is that free markets do not fail with out gov. intervention. But before all that, lets look at the facts that even the most progressive democrat agrees on. USSR failed because their economic structure bankrupted the country. America even prior to the Fed Reserve act of 1913(?) was the country of massive improvements in quality of life and prosperity. The main problem is people look at OTHER PEOPLE's self interest and say that it is motivated by greed instead of being thankful to God that they have the right to be rewarded for their own self interested hard work. Basically capitalism through allowing the freedom to be rewarded works better than Socialism in which no one looses their jobs even if they are drunk (I'm from Russia btw). Markets don't fail on their own. Companies do, people do, but not the entire market. In fact the constant failure of private enterprises is part of capitalism. Markets fail when they realize that their assumptions have been based on lies. Such as the worth of worthless assets. So ask yourself why were these assets so overpriced? Or better yet ask yourself why during the tenure of the Fed Reserve inflation has robbed the dollar of 97% of its worth even though the Fed claims to battle inflation. The Fed creates the bubbles with cheap money that is then multiplied through our banking sector. The best regulation that could be created to prevent market failure is making fractional reserve lending illegal. But that is not in the Gov.'s interest. Gov is not honest, they pay for wars through inflation instead of taxes. The inflation creates too much money in the system and makes interest rates low. Then because interest rates are low NPV is overvalued because the discount rate is too low. So people make business decisions that are negatively profitable when they think they are in the black.
Nate, why do you think economists will come to a consensus? Argument is the essence of academic discourse, isn't it? I would suggest that it's unlikely that economists will come to a consensus, and that, therefore, we will be faced with the choice of letting "experts" do their work without any input from us non-economists, or expressing opinions based on a lack of expertise. We need to keep in mind that the Bush Administration's "experts" did a great deal to bring about this disaster, partly because most Americans were too ignorant to know how bad their economic policies were (I among them). The modern world is complicated. Most of us are not generals, yet have opinions about war and peace. Most of us aren't doctors, but have opinions about health policy. Many of us are teachers, but even many who are not have strong opinions about education policy. The economic situation is very scary, and I understand your point of view, but I'm unconvinced that angry flailing isn't better than a total abdication of responsibility to the "experts." At least if the people who represent us know what's bothering us, they can try to take it into account in their thinking. And I don't think that the people making economic policy should feel anything but great pressure on their heads. Their decisions will literally be the difference between life and death (due to suicide, addiction, loss of medical care) for many people.
This is neither the time nor the place for mass movements -- this is the time for expert opinion.
yes, this is actually the most anti-democratic sentiment i've seen expressed on any blog, left, right, or otherwise, in the history of my internet reading -- 10 or so years.
on the left, we ridicule people from groups such as International ANSWER because they subscribe to Lenin's view of struggle via a 'vanguard party' - a very select few individuals, self-appointed of course, who 'know how things are to be done' -- everyone else should just do as they're told.
good to see our leading political analysts are following in the footsteps of the people who wrote the Constitution, protecting the rich from the rabble.
How did the Stock Market collapse occur? People were leveraged 10 to 1. If it made the NYSE collapse why allow it for the banks? No one. No one is talking about taking away the power of banks to make money out of thin air. Why not? Why is wamu allowed to lend 10 times the amount of money it has on deposit? That is what makes the bubble. Let the bubble burst. Have you heard this bad bank bullshit? Nationalization of private risk at the greatest (and most blatant) level ever! If there is no risk for the bankers then why would they care? They knew we'd bail them out, so they through caution to the wind. Let the Gov pay if we loose. This TARP 2 is at its base unethical.
parsaion- I agree with your latest post.
Letting the private sector run things sounds nice and pretty in theory, but for some of the reasons you posted (many more, though)- it would turn out to be a disaster in practice.
Would we really want (what are currently) our public works moved to the private sector, where they would all be fueled by the profit margin? Sounds good to some, not to me.
Look, at the end of the day, Obama is being what he always was; a pragmatist who wants to aproach problems with an open mind. He is not, and never was, a left wing ideologue, and this is coming from an Obama supporter. Those who expect him to take a hard left, punative stance against Wall Street ignore what the guy campaigned on. Keep in mind that Wall Street donations went heavily towards Obama and that Wall Street states (NY, CT, and to a lesser extent NC, IL, and CA) are all hoping Obama can pull us all out of this.
Yes, Chris,
You are right the USSR was much better than America. What has capitalism ever done other than create the most prosperous nation the earth has ever seen? Do you know that in the USSR 5 person families lived in a single room? Now there's some quality gov. allocation of resources!
People appear to be in some strange state of shock about all this. Geithner can't give answers because no one can.
This is a near perfect convergence of 8 years of incompetence, laxity and corruption at the White House, unprecedented scheming and risk management failure fueled by greed at Wall Street and the glorious stupidity of millions of status anxious wanna bes who signed off on debt they couldn't handle as the best marketing minds money can buy cheerled them every step of the way.
And this demise no upon us is the coronation of moron nation.
So yesterday's 4 percent plunge was more than some little tantrum, it was fear, like 'holy shit, this guy's been in the catbird chair all through this unfolding catastrophe and he hasn't a clear answer, nor does Volker nor anyone else.
Wall street blew itself up with much of a witless nation happily helping in a grand pig pile search for the grail of 'something for nothing'.
@ Nate - to ensure that Treasury gets an honest look at the condition of the banks (i.e. sees their books)
Geithner is probably going to need some smelling salts after looking at those books.
Which expert to trust?
Lol. Politicians have never had a problem working that one out. First they figure out what is in their personal best interest, than they go find an expert who agrees.
On the evidence the only diference between an economics expert and a hooker is principles. That is, at least the hooker will insist on using a condom.
wv. porthype. - I never do thet. I just drink it all quietly.
I live in the IL 5th and attended the candidate forum a couple of weeks ago, and I agree that we could do a lot worse than Charles Wheelan. Right now I'm trying to decide between Wheelan and Geoghegan, although I also liked some things that Jan Donnatelli and John Fritchey had to say.
Personally, I don't know any more about economics than it takes to balance my checkbook and make a monthly budget. Isn't the whole reason that we have a representative democracy is to listen to the ideas of candidates on issues far more complicated than we can handle, and then vote which one we want to run things? This is not, I believe, a difficult concept.
In the last two years, we've gone from having a Republican President, a Republican House and a Republican Senate, to a Democratic President, huge Democratic majority in the House, and almost super-majority Democratic Senate. Clearly we, as a nation, have decided that we want Obama and the Democrats to implement their ideas and see where it goes. That's it.
There have been two decisive elections in a row, and the losers and their experts do need to sit down and shut up for a while. I know having two talking heads debating an issue, regardless of the merits of their particular arguments, makes for great television...but our national (and world) economy is not "Hardball".
We cannot wait for a "consensus" from the experts: Right now, there seems to be an ideological division that separates the economists and the Congress. We are in a position in which everyone agrees that doing NOTHING will lead to certain failure. We have to choose one solution or the other, we cannot do both. Doing a little bit of one solution and a little bit of the other is also not a solution: Think about a ship trying to avoid a rock in the ocean, with half the crew wanting to go left and the other half wanting to go right. A sensible compromise does NOT mean going straight ahead, just because it is a compromise between left and right! The correct compromise: Compromise by choosing ONE of the two solutions, and then implement it whole-heartedly. The compromise must be in the decision, not in the implementation; or we will end up hitting the rock.
The problem Nate is this. 2 and 2a are the root cause of this "Crisis"
We're in this mess because of the way wealth has accumulated in this country.
If all the economic growth experienced over the last 2 decades had been more equitibly distributed. Had the common people gotten their fair share of their productivity. Then they'd have been able to pay their friggin mortages, They'd be able to afford all the dodads that these corporations need to sell to stay in the black.
As it stands now we've got this kookie situation where we've had massive inflation over the last 30 years do to increases in productivity. However since that wealth has been allowed to accumulate in the hands of a relatively small segment of our population we've not seen the common persons spending power keep pace.
There is not a banking crisis. There is a wealth crisis. THe problem is that this investor class who has no appreciation for real work has been playing games and using funky mathmatical models to accumulate more and more wealth. In doing so they have made that little bit of wealth that "trickles" down to the rest of us worth less and less.
The insane commodities prices over the spring and summer of last year were a direct result of all this electronic "fake" money from the CDS markets being used to speculate in in other markets driving prices far beyond what the normal supply and demand mechanism would otherwise have created.
That's why when the CDS bubble finally burst the commodities prices dropped like rocks back down to reality.
This was further a glaring example of why extreme concentrations of wealth are unhealthy for society in general. These speculators were competing for a commodity that the rest of us needed (oil) but because they had so much surplus wealth they were able to drive prices beyond the means of most people.
So the problem with your screed is that with out recognizing the root fo the problem you can't address the results.
Or as I always like to say. Unless your base assumptions are accurate then you can only be right by accident.
That's the problem with Obama's economic team. They are people who have an ideological block against recognizing the root cause of the problem. They are invested in the current system and are incapable by all evidence of the paradygm shift needed to actually do what is needed.
He should have brought in people like Krugman and Stiglets who predicted this mess in the first place rather than the idiots who helped set up the circumstances that led to this meltdown to begin with.
RufusRules said...
@ Nate - to ensure that Treasury gets an honest look at the condition of the banks (i.e. sees their books)
Geithner is probably going to need some smelling salts after looking at those books.
*******************************
Those in charge have almost certainly already seen enough of "the books" to know that these institutions are insolvent (remember, Paulson was trying to keep everything on life support for over a year before he had to fess up and go to congress).
There are no good solutions.
RufusRules said...
@ Nate - to ensure that Treasury gets an honest look at the condition of the banks (i.e. sees their books)
Geithner is probably going to need some smelling salts after looking at those books.
--------------------
Well said.
Quote: This is neither the time nor the place for mass movements -- this is the time for expert opinion.
yes, this is actually the most anti-democratic sentiment i've seen expressed on any blog, left, right, or otherwise, in the history of my internet reading -- 10 or so years.
Enquote
FWIW, I disagree that Nate's post is "anti-democratic." (And how hyperbolic of you to claim it's the most anti-democratic statement you've seen on any blog in the last ten years! What've been reading?!)
Anyway, Nate expressed his opinion, he stated it strongly and urged others to take the action he recommends. But he did not say it would be unpatriotic (for example) to hold another opinion. And when he urged tackling those who obstruct, obviously he's referring to those in a position to do so -- such as our public officials. He's not talking about -- or I don't believe he's talking about -- those who simply disagree.
The Democrats are in the pocket of the banks. They will consider what's best for the public and what's best for the banks and pick somewhere in the middle. A solution that would destroy the banking industry but help the country as a whole won't be considered.
I'm sorry, but I can't buy your assumption #1. What Obama's team considers the best result isn't close to what a vast majority of Americans would consider ideal.
And that's why we can't stay silent. Not because we know what the solution is, but because we need to insist on what's actually going to be solved- best for the banks, or best for us?
Terrific post, Nate. Let a consensus form amongst qualified economists.
The views of economists right here
http://www.youtube.com/watch?v=hRkj5rgRtAs
Damn. This post is so...unlike you, Nate. I thought someone hacked your site for a minute.
Do we want to be like Sweden (nationalization of banks and their return to the private sector with a recovered economy) or like Japan (spending only and an L shaped recession)?
We've already partly nationalized the banks, and the lesson to be learned from the great Depression is that half-assed measures don't work.
Having said all of that, I, too, am a non-expert in these things. I'd defer to the experts if they were in agreement. But most of them aren't even sure today is Wednesday.
Lindy222 - living in a democracy doesn't mean that you simply have the ability to hold a contrary opinion. It means you have the capacity to actively engage in government; and if that capacity isn't acted on, then democracy doesn't exist. And in that sense, Nate's comment was indeed anti-democratic; not the most anti-democratic sentiment ever uttered, but the most anti-democratic sentiment ever uttered at fivethirtyeight, for sure.
Dan said: Isn't the whole reason that we have a representative democracy is to listen to the ideas of candidates on issues far more complicated than we can handle, and then vote which one we want to run things?
No! Absolutely not. Democracy isn't just the right to vote and then wash your hands of the responsibilities of government. Like I said above, it means actively engaging in government at all levels and exerting political pressure to pursue your reasonable interests. Big corporations certainly understand this; you think if we all just let the experts decide, Wall Street and the Fortune 500 are all going to do the same? No - they'll just move into the vacuum created by a public that has shrugged off its democratic responsibilities.
The unfortunate thing is, Americans seem to vote Democrat after the shit hits the fan, and they vote GOP when times are good.
In 2000, there was a bit of financial turmoil in January, but it was not severe. The budget was well on it's way to achieving what had seemed like Ross Perot's wet dream-the national debt looked like it could get paid off in full very shortly, and we would have a nice surplus. Despite the fact that it was Democratic governance that got us there, the US went for Bush.
In 1992, the country was not in such good shape. Reagan-Bush had spent us into a hole, jobs were scarce, and the military looked like it was wandering around the middle east looking for a new USSR to contend with-and thereby justify it's existence. We had to settle for a third-rate backwater nobody had ever heard of as a stand in for the 'Evil Empire' that commanded a US military budget of epic proportions.
In 1980, the oil shock and the economic malaise were attributed to a weak performance by Carter's cabinet, but they were not bad enough to keep Democrats in power-and the Iran thing kinda did more harm to Carter than anything else. Maybe this would qualify as an exception, but Iran was a huge confounding factor in the model.
in 1976, we were still in malaise, and Ford was the first completely unelected President in US history. He was also Nixonized.
1n 1968, as far as I can tell from reading Greenspan, the economy was doing a little too well- the federal government owned what he thought was an excessive amount of property, which if counted as assets would have generated a surplus. Why Greenspan thinks this is a bad thing is unclear to me, but then again I'm not an economist, so what the fuck do I know?
Anyway, the point of this huge rambling post is that if Obama succeeds in fixing the economy, the GOP will most likely win in 2016, due to this bizarre trend we have in the US of finding a Republican to make us poor whenever Democrats succeed in making us rich. The Republicans never seem to disappoint us, either.
I agree Statler. Every time the Democrats bring prosperity, dumb America elects another Republican to screw things up again.
Nate, you are letting us down. Geithner is going into contortions to keep banks privately owned - even if it means short-changing the taxpayers enormous amounts of money. Taxpayers MUST get value for their financial assistance to these incompetent banks. Taxpayers MUST prevent money from being misspent and recapture ALL bonus and excess pay money from these failed captains of industry.
It is important to remember that Herbert Hoover did not intentionally crash the economy with his policies. Likewise, I don't think Geithner or Obama wish to have their bank restoration efforts fail, but their rigid ideology may make the bailout a disaster for the taxpayers and we cannot afford that.
If we can insist that unemployed people, students, and welfare recipients do certain things to receive money, surely we can do the same with bankers. If a private individual invests money in a corporation, they get a stake. Why would the taxpayers get less than a fair stake in their investment?
The only thing I'm positively sure of about the economy is that I know way more than John McCain.
Thank you for being one of the few reasonable voices out there. It's tiring to hear why Obama will fail because 1. He's not going to get rid of taxes or 2. He's not going to nationalize every part of the economy.
While I am just a college student getting a majors in Econ, what I do know is that there is no easy out and nothing is fool proof.
However doing something is infinitely better than nothing. Our economy is in a negative spiral, like a feedback loop, if we sit by and just watch it will get to be as bad as it was during the depression and maybe even worse.
Unfortunately the only thing we can do to cause a positive shock in the GDP is to stimulate the economy with government spending.
Though Geithner should have waited until he had something more substantive to say, I can see where he was coming from. The whole point of yesterday was to show that they were working on something in what I would assume to be part of a more "transparent" administration. While I can't say if they'll get it right, there are very smart people working on that plan who will make sure it won't be wrong.
"I'm sorry, but somewhere between 99.9% and 99.999999% of us are severely underqualified to be making policy recommendations on this particular issue."
This is what has been bugging me the most. I'm not that sharp on economics, but this whole bailout thing doesn't seem like a good idea. It seems wrong on so many levels, yet so many economists that have spent their entire careers trying to understand the economy seem to think this is the best solution. At the same time, even our best and most respected economists are the ones who pushed forward ideals that got us in this mess. So who can I trust for data short of dropping everything and trying to become and economic expert overnight.
Statler wrote,
"Anyway, the point of this huge rambling post is that if Obama succeeds in fixing the economy, the GOP will most likely win in 2016, due to this bizarre trend we have in the US of finding a Republican to make us poor whenever Democrats succeed in making us rich. The Republicans never seem to disappoint us, either."
Okay, aside from when George W. Bush took over from Bill Clinton - and that example only works if you're looking at it phenomenologically, without considering the historical background of the 1990s and early 2000s - when has this EVER happened?
Note to everyone who is confused because 'all the leading economists were wrong' or 'they all led us into this thing', or some other nonsensical remark -- who are you reading, watching, and/or listening to?
If you want to have a view of the world that makes some sense, then read Chomsky, Eschaton, Roubini, Palast, and Democracy Now.
It's not rocket science.
@Pete: That is in excellent point. The guys you mentioned have been calling it accurately for a very long time. It seems no matter how accurate they are, the "liberal" news media continues to ignore them.
I've got to agree with Shaun and Chachy.
Nate, this is a really disappointing op-ed you've written. There's a real contradiction between your admission that "Their ideas may be wrong, but their hearts are in the right place," and the idea that we should clear the field to let experts come to a consensus and then see who blocks the agreed-upon solution with ideology. If their ideas are wrong, as I believe they are, then our economy doesn't care where their hearts are.
Expert opinion is ALREADY founded on ideology. And my concern is that the Obama team is made up of experts who are ideologically opposed to solutions posed by Nobel-prize winning economists like Krugman and Stiglitz. Why should these economists who sounded warnings about this collapse long ago be shut out of these conversations looking for solutions in favor of the free-market neoliberalists who brought it upon us like Geithner?
I agree with your evaluation that ideological partisan hackery in the blogs and media are counterproductive. I agree no one can know with 100% certainty how to get us out of this mess. And I definitely agree that Obama's team all genuinely want to clean up this mess as quickly and painlessly as possible- why wouldn't they? But you could argue even Rush Limbaugh, saying he wants Obama to fail, has heart in the right place because he genuinely believes that the democrats' ideas would be ruinous for America.
Yes, we should let experts write the policies, and make sure they are written in good faith, free of partisan hackery. But experts don't agree. If they did they'd be out of a job. So we should be asking questions of our experts, and I think it's more than fair to ask why the ideological scope of Obama's economic team is so narrow and so tied to the thinking that has been wrong the past 30 years!
I also wish that Progressives would stop treating Krugman like a patron deity.
I agree with CVHicago. Nate, I love your website, but this time you are wrong. I think part of the reason Obama's team isn't looking at what is probably the best strategy - i.e. nationalization - and instead is still pursuing the fundamentally flawed strategy of buying unpriceable toxic assets is because they are afraid of the political backlash that would come if they nationalized (even thought the government is already the de facto majority equity holder of several major banks). Even the great capitalist Ronal Reagan nationalized a bank (in Illinois, I think) in 1984. What we as active citizens should be doing is generating support for nationalization and against the purchase of toxic assets to create the political space for Obama's team to do the right thing.
An EXCELLENT video interview with Stiglitz which explains why nationalization is virtually inevitable, and the longer we fool around before getting there the worse it will be for our economy:
www.talkingpointsmemo.com/archives/2009/02/tpmtv_stiglitz_on_the_bailout.php
Wow, I'm shocked and amazed, even partially stunned! A post by Nate that I can TOTALLY agree with. Smart people know when they don't know something. I'll still disagree with Nate when he's wrong or ignorant on a subject, but this post was uh (sorry) on the money....
The reality is, like many others have noted, that there is no easy solution to the financial crisis at the center of our current recession. There might be a populist sentiment to say good riddance to Wall Street and allow the major banks to fail, but that would have a catastrophic effect on the global economy, and simply isn't a viable option. Some sort of bailout towards the banks is necessary, but the question lies in what is the right way to approach it.
The first thing we need to do is make a thorough check of every financial institution and single out the ones that are either already insolvent or at imminent risk of becoming insolvent. We shouldn't just give away money to every bank that comes looking for a handout, like what was apparently the case under Paulson. Furthermore, the money we give them has to come with strings attached. These banks and their executives need to be held accountable for the excesses and aura of entitlement that happened under their watch even as they were losing billions. That means capping executive pay and oversight of discretionary expenditures by the Treasury Department.
The bigger challenge lies in how we ensure that these banks, after taking bailout funds, are not lining their pockets with taxpayer money. The easy solution to this problem is to simply nationalize the banking industry, but that is not optimal in the long term, and conservatives no doubt would never let it happen in any case. In my opinion, this is the toughest challenge to be faced.
Nate, like everyone else, I've been following the development of this debate very closely, and you're the first blogger to say what really needed to be said about it. A lot of very smart people simply don't know enough about the situation to make policy recommendations or have let their policy recommendations be guided by ideologically founded assumptions (generally the assumption that the banks are insolvent, because everyone knows the worst is always true when it comes to banks - I'm looking at you, Matthew Yglesias and Paul Krugman). Thanks for saying this, and I hope your thinking catches on.
Point of reference:
in the years leading up to "the Great War" (which began in 1914 and really only ended in 1989) there were many smarty-pants who advocated war in the abstract as a GREAT CLEANSING of all the illnesses of European society.
Well, they weren't so sanguine in 1916, 1919, 1929, 1945. So if you think great impersonal forces are likely to help us all out, you should consider whether in fact maybe lack of consciousness and conscience is the original problem, and consciousness and conscience the only cure.
Does anyone here know what % of the GDP the New Deal spending was? Is it graphed anywhere to show spending as compared to GDP from 33-39?
Can you believe this?
The Senate and House negotiators have agreed on a compromise Stimulus Bill.It's for $789 billion,$49 billion LESS than the Senate bill and $31 billion LESS than the House bill.
Harry and Nancy caved in record time!
q: How can you spot a REAL conservative?
a: He thinks Robin Hood was a villain.
Maybe we don't know how to fix it, but we sure as HELL know what went wrong, and like a gun going off, we might not be able to repair the damage.
The fact is that others walked away with trillions, immorally but legally, and we can't get it back.
That $500,000 house that is now worth $200,000? Well, somebody, a builder or previous owner, sold it for $500,000, and the bank that wrote the mortgage for $500,000 paid him in cash, and then sold the mortgage for $500,000, and now investment firms and others are left holding the bag: Forget all the derivatives and credit swaps and blah blah, the bottom line is that esentially somebody has paid $500,000 for a $200,000 house, and they are out $300,000 no matter how you stretch it.
Multiply that by the millions of houses sold at inflated values in the last eight years, and there is your trillion in losses.
And there is no way to "fix" that with clever regulation or anything else, we are screwed and have to pay.
All the Obama team can do is try to obscure the issue. And the banks will fail anyway, because they have lost the ability and will to make good loans. That capability has been in atrophy since the end of the Clinton era; when they no longer had to service loans but could sell them (due to Phil Gramm legislation signed by Clinton for the 2000 budget).
It is just the law of evolution, it takes energy to maintain a capability, and if you don't use it you will lose it. The banks evolved to the point where they can no longer survive on a measly 6% or 8% return on a loan. They can't survive without being able to sell a loan and recapitalize.
So who knows if there is a solution, but right now we are lying on the sidewalk with a gunshot wound to the torso and suffering systemic failure, and not a doctor in sight.
The money is gone. The conventional banks are dead. The losses are real.
They won't ever have a consensus Nate, they are economists! It is a soft science (at best)! It is BS!
We can complain, as can you, because puting a bunch of fancy words around their opinion makes economists just as wrong as the rest of us. Part of this is simply perception, and consumer confidence, and who knows that better than consumers?
Nate-
Remember, the guy who thought he was Ayn Rand's Superman economist is who got us into this - blame Greenspan. So, who is the Superman economist we should trust now? I pick Bernanke, fire gethner already.
Dude, I wasn't sure if you would have game after the election season but I must admit you're finding a niche with your analysis of the economy, the political votes, etc. Nice job keeping your site relevant and providing some unique analysis and commentary to the complex world of recessions, finance, and all that.
Opus,
The bill might still be better, even at the lower amounts - it shrunk some of the least effective tax cuts and restored some of the most effective spending cut from the Senate bill.
wv: mallnest - where mallrats come from.
Amyers, I don't think anyone (anyone sensible, at least) is recommending that we nationalize the entire banking industry. Just banks that can't raise enough financing in the private markets to meet their obligations. There are certainly some number of banks out there that have managed their affairs better than others and there is no reason to nationalize those banks or to limit the compensation of their management.
And conservatives should be reminded that their patron saint Ronald nationalized a bank himself in 1984.
True enlightenment will have arrived when the rich come to the realization that THEY are better off when the poor and the middle class are better off. The more money there is circulating at the lower levels of the economic food chain, the better off the rich would be. I've never understood why such a simple concept eludes many of those who have money. If I was a millionaire or billionaire, I would want the workforce to be happy and comfortable, with economic security for their families, and decent healthcare. The winner-take-all model is a losing propsition for both rich and poor.
Maybe their ideas are wrong -- but their hearts are in the right place.
Sadly, econ is the dismal science, and cares little for hearts, broken or not. The Democrats have chanted "Recession" for years, championed (along with the Republicans) the "reregulation" to make things better, and now they have one. Welcome to the real world of self-fulfilling prophesies, rather than the illusionary one of self-fulfilling dreams.
Wow, what a ridiculously wrong post.
1. Obama might want to get out of it, but he has systematically frozen out everyone EVERYONE who has put forth ideas that can actually make things better instead of worse.
2. Yes, Open Left was making the creative destruction argument hardcore during September.
3. That hasn't stopped you before. But look, it is huge and it is a complex problem. But Obama flat out admitted (and Geithner and Summers) that they are ideologically committed to a particular set of options. And that's fucking wrong.
4. Wow. Just... wow. Look, I think Dave Sirota acted like republicans with his anti-expert stuff in September but to clear the fucking field? That's the kind of ideas I dislike most about SABR thinking and it's a massive failing you just exhibited.
You might as well have said the same thing about Bush and Iraq or the war on terror. No president want to F*** Up and ruin his legacy, but sometimes principle means more to them than politics.
Obama has the desire to be a transformative President. He is palpably self-conscious about it, comparing himself to Lincoln and musing over Reagan's legacy v. Clinton’s.
He is also undeniably an ideologue, but as a liberal he knew he has to mask and conceal this in order to be elected and maintain the people's trust.
Still, at the end of the day, his zealous soul will not rest until he has been able to re-work the world according to his own extreme liberal predictions. What these are are manifest to any who have thought about his associations and his less guarded utterances`, of which there are fewer and fewer . . . .
Sadly, with this stimulus package he has almost single-handedly undone the Reagan revolution, not just by blowing a massive hole in the federal deficit, but by using it as a vehicle to pass into law a whole host of liberal policy proscriptions that would never have seen the light of day but for the cover that the stimulus bill afforded them.
As a tactician, Obama is to be applauded. And his Republican opposition to be condemned for failing to make the right case against this bill.
Most of us ain't kosher so we can stand a little pork, but the re-working of society along liberal lines caused by this bill will set us on the road to ruin.
I doubt very seriously that this bill will do much to fix the economy, and Obama will own the recession by year's end, if not sooner. He has staked such high hopes on his competence that the people will not wait long for results.
Even if there is a temporary period of recovery (which is doubtful) the long term secular trend for economy is stagflation -- a return to the poor economic performance of the 50s and 70s that most likely will see Obama and the Dems ushered out of office, but like Reagan before him he will have left behind a potent legacy that will take years to undo.
Trust a call for patience to bring out the most radical, decisive positions on all sides. Its so easy to be certain when you know so little of the forces at work. Then again, so many of you on both sides are being so obdurate in making what are untenable claims in our governmental structure its just hilarious. Do you truly live in a world so devoid of contrary opinion that you can't see you don't have a sure fire panacea, because there is no such thing?
BTW . . .
Did you notice how Nate has endorsed the theory of trickledown economics? He wrote:
"If the banks fail, then rich people lose a lot of money, and poor people lose a lot of jobs (and also much of what money they have)."
Zero's stimulus ignores this proven theory in favor of trickle up (which reminds me of a joke about a chick and a dude having a pissing contest against a wall, but I digress).
Obama's economic plan relies on getting money into the hands of the poor over the rich. And I certainly endorse that as a palliative measure to alleviate suffering. But make no mistake the only thing it will stimulate are the cigarette and malt liquor industries!
"Sadly, with this stimulus package he has almost single-handedly undone the Reagan revolution, not just by blowing a massive hole in the federal deficit,..."
Umm, PeteKent, I don't know if anyone told you, but Reagan blew a massive hole in the federal deficit himself, and so did the Reagan revolutionaries that ran the government under Bush.
I would just like to say "right on Nate!" I posted a similar comment (though not as well said) on Daily Kos yesterday and got some of the most unenlightened feedback I could imagine. I've been angry all day. What kind of dialogue is it to just yell at someone you disagree with? Nate, I heartily agree with you, and I think that all those nay-sayers out there who think they know what they're talking about will be proven wrong.
Nate doesn't seem to understand much about the FDIC, nationalization (which is a change in ownership, so no jobs are lost -- bad bets do not mean we need to reduce jobs).
The banks are insolvent, and everyone knows it.
Global Depression, here we come! (well, conjure bag thinks we're already in it).
Bernake is the American expert on the Great Depression...
And summers is... still an asshole.
And Nate is sounding eminently reasonable:
"Once the experts (and I'm not one of them) have reached some kind of a consensus about what the best course of action is (and they haven't yet), then figure out who is impeding that action for political or other disingenuous reasons and tackle them -- do whatever you can to remove them from the playing field."
But why is it then, if there is no consensus and things have not been figured out that Congress is about to pass an $800 Billion economic recovery bill that no one is sure will work?
Isn't this the real lesson of Japan's lost decade, that headlong action of throwing money at problems doesn't work?
Nate and all of you should be disappointed with Zero’s haste to pass this bill. As noted above, however, the bill has less to do with the economy and much to do with the installation of a liberal social agenda. Sigh!
Ok, I have figure out how I would respect this kind of bill.
Since the largest dollar holders are OPEC, China, and Japan then go ahead and devaluate the dollars they have. Sure itll doom us also, but it would allow America to make significant preperations for the changing world. Get of declining supplies of oil which will become rediculously expensive in the next decade. Build new production centers and factories and store up food and then let the whole thing collapse through hyperinflation lowering american standard of living and creating strong competitive advantages in those newly built factories! See that way we burn China's dollars to come out strong! But unforetunatly this bill will not increase production capacity. Anyways its a pretty crazy idea anyways, but it still makes more sense then spending money you don't have in order to get rich again.
Also, to anyone who supports this bill or Nate's observations, for god's sake watch a video of Milton Friedman or two, learn something about economics. Read Murray N. Rothbard's America's Great Depression.
peter
Yours is an opinion which doesn't require an expert to agree with. Those who practice and preach pure acquisitiveness are working out their own psychological problems at everyone else's expense. They seek a level of security and certainty that no amount of money can fill. Citizen Kane would seem to be a good example of that pattern.
I think we do ourselves a disservice to separate economics from psychology (and perhaps from religion, in the broadest sense) by assuming that there are laws of commerce that are not tied to behavioral/spiritual principles. Of course, sectarianism has no place here. I'm not talking about adopting a state theology, as much as fundamentalists would love that.
In a strange way, the wealthy are often products of a spiritual poverty that makes them more pathetic than admirable. Admittedly, their corporate behavior calls for serious regulation and , yes, some form of wealth redistribution would seem to be in order given the extreme divergence of rich and poor in recent times. But it's not a matter of how "bad" the rich are. It's more about how deluded they are.
In my mind, wealth-driven people are much like drug users, hoarders, compulsive gamblers, extreme over- or undereaters, etc.
Who are the experts on such matters? Not pure economists, I dare say. I'm hoping Obama's got his eye on the bigger picture here.
Your UChicago education is showing up.
Yes! Let the philosopher-kings rule!
Nate, do yourself a favor and stick to the statistical analysis bro. Just because Geithner's heart is in the right place doesn't mean he has the intellectual capacity, nor the perspective necessary to fix the system. He's invested in the preservation of the existing way, both consciously and subconsciously. He knows that the banks are insolvent, but won't admit it on the record. Perhaps that's in the national interest to avoid a bank run, but unfortunately his solutions won't solve anything.
Economics aren't that difficult. We know what the problems are. 1) Banks have been poorly regulated, enabling them to over leverage themselves on risky loans, and 2) As a result, we have no idea what type of losses these banks are really experiencing, nor what the value of their "assets" really is.
Until you fix those two problems, you aren't going to solve this problem. Geithner's plan solves neither. He is not forcing the losses out into the open, and is not reestablishing necessary regulations on the banks. To compound matters, he is throwing hundreds of billions of dollars into the black hole of known-insolvent banks, and allowing those fraudulent banks to continue to be run by the same executives who put them in this position.
Geithner's plan is a disaster. Unfortunately, the time bomb is ticking. We don't have a lot of time to deliberate, debate, defer to experts, and get this right. If we blow our remaining chance at fixing this the first time, we are going to set an unavoidable course for a depression. That's why deference to the "experts" who created this mess is a disastrous idea.
In closing, I'll use an analogy I know you'll understand. The Pittsburgh Pirates have been a disaster. How skeptical would you be of a plan to allow Dave Littlefield to "bail out" the franchise? Very. Why? Because he helped create the mess, and therefore doesn't have the outsider's perspective and unvested interest necessary to fix things. Nor do Geithner, Summers, Volcker, etc.
Obama picked the wrong team, thinking - like you - that economics is complicated and only those in the industry can fix it. And for that this country is going to pay - dearly.
@eezie
Can you provide a link with details that support your claims about removing the ineffective tax cuts? I would be happy if that were true- but this NYT article suggests that the AMT is the least effective and most expensive tax measure and it is still in the bill.
To Russo and all the other free marketeers out there - cut out the tired Ayn Rand/Ron Paul thinking that if we don't embrace free markets we are on the path to Soviet-style destruction. The Soviets were economically disadvantaged from the moment they took over, just like the czars before them. They were doomed almost from the outset because of their political ambition to be the dominant superpower regardless of cost. It just took 70 years (really, not very long in the scope of time) for the rot to bring them down in favor (ultimately) of more of the same nationalist sentiment in Putin. In 20 years he'll be trying to reconquer the Baltic Republics and still there won't be good agricultural distribution. It doesn't prove squat about the value (or lack) of the market as a force for good or evil.
Attempts at pro-business, nearly free markets in the 1920's(save for the weak kneed enforcement of antitrust laws by AG Palmer - who was much more interested in breaking the IWW) and lack of government oversight led to widespread looting of government assets (Teapot Dome being the capstone), catastrophic agricultural mistakes that created the Dust Bowl and epic displacement of America's population as well as that little stock market crash of 1929. All of this led to financial upheavals that are difficult to imagine from our modern comforts - as yet, we don't have hordes of hoboes swarming trains or tent cities all over the country. We nearly embraced socialism in this nation as a result of the initial failure of the government to act and citizen outrage. We can't really see those same outcomes (including a socialist government) today in no small part because of regulations that were put in place to address those multiple cascading failures. So if nothing else, value regulation because it tends to blunt society's reactionary tendencies.
If you want to know why we have to have some government regulations of the economy in a representative democracy, expand your reading list. Read contemporary literature documenting just what was going on from the perspective of the worker and other members of the lower economic strata in the 1920s and 30s and you might get a better feel for how close the nation really was to another revolution. Books like Steinbeck's Grapes of Wrath, Sinclair's The Jungle and Oil!, anything in Dos Passo's USA trilogy, or Ellison's Invisible Man documenting the tumult in the African American community. Much better than anything by Rand, and much closer to the reality of the situation.
@ Ezzie and everybody else
My comment above about an greed upon compromise StimUlus Bill was incorrect.It was based upon an incorrect article on the NY Times website.The Times has now corrected itself and reports that Pelosi and the House group has not ,as yet,agreed to the Reid cave in.
I think there are two reasons why Geithner's statement came off as too vague. (1) They really haven't figured out what to do yet (and the situation is changing a bit every day); and (2) the situation is a lot worse than they care to admit publicly for fear of creating a banking panic.
On the latter point, we only have to think of how much "money*" -- or imagined or "bubble-driven" money -- that people had in their 401K's, mutual funds, hedge funds, IRA's, homes, etc. And how does that Money* compare now with the Money that their accounts and properties are actually worth in what would be a "normal" market.
The Treasury Dept. and the Fed need to think of how that Money* should translate into Money -- and who is going to bear the brunt of the losses during the process or deflation or revaluation of all those paper assets.
It's easy to say that we should just let the weak banks fail, but if that happens a whole lot of collateral damage will occur, and the harm may fall most on the middle and working classes. If, however, some order can be brought about, i.e., the financial crisis managed in some way, then the collateral damage might be reduced. And just as important, the burden of the losses might be more fairly distributed; while those who are least able to suffer from a national economic calamity are given a bit of a protection.
For these reasons, I don't think there's ever going to be clarity as to the extent and nature of the problem in the financial system. Geithner and others are just hoping to stabilize things and that this will lead to a reasonably normal functioning of the market without wild deflation in housing or inflation in the dollar.
Since this is a unique situation, the "theoretical" issue is how to bring past experience and our understanding of how the economy works to bear on this particular problem. There will never be a consensus of experts on this. In fact, there isn't even a consensus on who the experts are!
Juris said...
"I think there are two reasons why Geithner's statement came off as too vague. (1) They really haven't figured out what to do yet (and the situation is changing a bit every day); and (2) the situation is a lot worse than they care to admit publicly for fear of creating a banking panic."
I agree with this. The problem is that Geithner isn't taking the logical next step, which is to figure out precisely what the damage really is. We still don't know just how significant the bank losses are. Until you know the scope of the problem, you can't fix it. And Geithner's proposals will not force the banks to come clean about the losses.
Until that happens, we're just throwing billions away into a black hole.
"For instance, even as negotiators accepted many of the Senate’s reduced spending provisions, they were careful to maintain an additional $6.5 billion for medical research that was inserted at the insistence of Senator Arlen Specter, Republican of Pennsylvania, who is a cancer survivor."
Specter is also a Senator from PA which along with NJ is a Pharma state so medical research is an INDUSTRY from his perspective.
too funny-
Berkeley
nice post
The Rand/Paul types aren't looking for data, they're embracing every adolescent's mantra: "Don't tell me what to do!" As a sort of fundamental notion, it's fine. People should be able to do what they like--within reason. It's the reason part that the free marketers aren't interested in. Patrick Henry was that sort of guy--good for starting revolutions, but a pain in the ass when it came to making government work.
Anybody over 19 who worships Ayn Rand is stuck in adolescence, regardless of their intelligence. "Objectivism?" Please.
I have, I know that union sympathizers were shot or killed. I agree that the way bussiness operated back then was obismal, and even today the way business expects the environment to subsize production with polution its devastating. But even then there was a reason why prior to 1930's when all of these horrible things went on people voted with their feet and came here. It was still better than anywhere else. Russia demostrates classic pitfalls of control economies. People simiply do not care about other poeple's money or things, so they waste it. Look at the BAM rail line in siberia. Look at communal living. Prior to the industrial revolution america looked much like Tzarist Russia. Yet afterwards people had their own homes. In russia there are still communal appartements because the government decided to spends its resources on other things. And people fled by the thousands, thats the deffinitive answer to Socialism v.s. Capitalism: where do people choose to go?
As for the leveraging, I agree. But large governments want the ability to finance wars and programs.
But forget the utilitarian argument. Is it ethical to take money (inflation) from those that saved it and transfer it to those who waisted it (homeowners, banks)?
http://www.huffingtonpost.com/william-k-black/the-audacity-of-dopes_b_165637.html
Again, this stuff isn't rocket science. Geithner simply doesn't understand how, or is unwilling to do what is necessary, to fix the problem.
Sitting on the sidelines while the Obama administration wastes valuable time and billions of dollars on ill-fated measures isn't logical or rational, it's assinine.
@RB and Juris-
imho There is a real problem in trying evaluating the damage in the banks- housing values are too dynamic to accurately estimate with any precision. Housing values are dependent on social condition and status- which are very volatile right now.
I wish we did not have a locker room culture on Wall Street- No offense to all you fans of professional men's sports but the hegemony of the sports world mentality has done huge damage to our country.
mhz
Untrue. The assets' market value is whatever a buyer is willing to pay for it today. Sure that may plummet further tomorrow, but that is irrelevant and completely speculative. That's what got Enron into trouble, for instance. Valuation must be based on the present market value. Figure out just how little these "toxic" assets are worth, make those numbers public, and much of the credibility and stability will return overnight. If the banks are so insolvent that you have to bail them out or nationalize them to prevent massive job loss, then so be it. But delaying the inevitable (the valuation of the banks' current assets) doesn't help anyone in the long-run, but simply postpones our much-needed medicine.
Ron-
But present value always includes discounted future cash flows. Present value is a speculative position.
And the market already spoke on their value, that's why they went bankrupt.
I think that's largely beside the point. The banks believe this stuff is worth X, but buyers are only willing to pay (.y)X. Ergo, the present market value isn't X, but is (.y)X. In other words, banks want 70 cents on the dollar, while buyers are only willing to pay 30.
Regardless, while some banks have gone bankrupt, there are still a large number of undisgorged losses out there polluting the system. Banks aren't lending because they don't trust each other's books. Until the true losses are forced into the open, no one will no who is solvent and who isn't. And until we know who is solvent, lending will remain frozen.
Geithner is hoping that taxpayer money can simply incur the losses, letting the existing banks remain standing. But - setting aside whether that is a prudent investment of hundreds of billions of dollars - that can only work if the gov't knows how much loss it is eating. Geithner doesn't know that, because he isn't forcing the banks to open their books.
Excellent post, as usual. Also, not entirely related, but perhaps worth sharing, especially considering some of the comments:
http://karws.gso.uri.edu/jfk/conspiracy_theory/the_paranoid_mentality/the_paranoid_style.html
@ Berkeley Bear - Books like Steinbeck's Grapes of Wrath, Sinclair's The Jungle and Oil!, anything in Dos Passo's USA trilogy, or Ellison's Invisible Man
Oh my. Excellent recommendations, all.
And, of course, Go Bears! (from a fellow Bear.)
Tim said...
A max of 99.999999% would seem to imply that there are at least three Americans who are qualified to analyze this situation and make intelligent decisions.
I'm not sure I buy that.
Actually 100 - 99.999999 = 0.000001 * 300,000,000 = 300 americans qualify to talk about the issue according to Nate and that sounds about right
While I normally agree with most of Nate's perspective, I disagree very much with most of Nate's post here.
First of all, the poor and middle class will not lose their money if we let the banks fail or nationalize them, at least not if we keep the FDIC while going through this process. People will be protected up to 250K per account (up from 100K). That doesn't mean everyone is wiped out. The people that get hit when the banks failed are:
1. The bank shareholders.
2. (maybe) The bank management team.
3. (maybe) People the bank owes money to outside the FDIC accounts.
4. (maybe) People over the FDIC limits (although historically they've got the majority of their money back).
The poor and middle class are not in the list above.
Moreover, while I agree that we as a society have gone through a previous 8 years with too much discounting of experts (scientists in particular), I don't think this is the time to "listen to the experts" for at least 2 good reasons:
1. Many of these experts are the ones who led us to these messes, and many of them have vested interest in certain types of resolutions of the problem.
2. Expert opinion is definitely divided on this into multiple camps. Some experts think nationalization is the right strategy as shown by the Swedish model. Some experts think any stimulus bail out is wrong. Some experts think a bad bank is necessary, while others think it presents too much moral hazard. In a case where expert opinion is very divided, and in a field where the experts have by and large messed up so royally over the past decade, I don't think it is right to sit back and wait for the experts to fix everything, or even for a consensus to emerge. Economists are not going to agree until it is too late to act. And you can't prove someone wrong conclusively the way you can in the hard sciences, so you can't just wait for consensus to emerge.
mbodell...
The fear of nationalizing banks or letting them fail has more to do with the global interconnectedness of these institutions. If you can picture these structures as forming a web, and that the failure of Lehman Brothers was like throwing an anvil through it, you might get a picture of what Geithner (and Obama) are afraid of. A nationalized bank isn't the same as a private bank--the interdependent affiliations that a bank had when private will tend to fall away when the government steps in.
russo said...
It does not include necessarily schools, roads etc.
Ever read or hear about the Northwest Ordinance, passed by the Continental Congress July 13, 1787?
Google it, and read what it says about public education and schools.
Oh, and remember, when the Constitution was enacted, the new Congress, meeting just 1 and 1/2 year after passage of the Northwest Ordinance, could have overturned the entire act, but kept it TOTALLY intact, without making any changes.
Ever hear of the National Pike? The Constitution says it is a federal government responsibility to control AND encourage trade. What better method to encourage trade than to make it easier to move goods from one place to another?
The compromise Stimulus Bill now final at $789 billion.
From the NY Times:
But even as Congressional leaders and top White House officials went through the package with a carving knife, it was clear that the three Republicans who agreed to support the bill in the Senate wielded extraordinary power
Another example of how vital a 60th Democratic senator is!!!
sorry nate, but you are wrong.
whether obama and geithner are tools is besides the point.
any plan that does anything beyond helping mortgage holders is a great big steaming load of horseshit.
because every cent we're talking about besides the actual mortgages is nothing more than money lost gambling. when geithner and obama have the courage to inform the finance sector that it simply has to forget about all the phony money from insane capitalization schemes, they'll be on the right path.
and yes, nationalization of the banks would likely have to follow pretty quickly after that.
all this "liberals need to stop criticizing obama" crap is getting tired.
at least obama's critics on the left (for the most part) aren't lying and slandering the guy.
Speaking as the sort of expert Nate mentions, I will say that the plan may not be as bad as the reactions suggest. A bank basically has three legs: capital, liquidity and assets. The CPP is looking after the capital, liquidity is ensured by the expansion of deposit insurance, debt guarantees and fed lending programs. The remaining problem is dealing with the assets. The problem is finding a way to start getting some of the bad assets out of banks without destroying their entire capital cushion with mark-to-market losses.
The Geithner plan was disappointing because it was a fairly subtle evolution of EESA than a revolution. Frankly "the market" wants everything fixed immediately with taxpayer money so they can get back to counting their bonuses. But "the market" would've liked a radical plan far less. This plan buys borderline banks some time, allowing them to charge losses to earnings over time instead immediately against capital. They want to get rid of them as much as anyone. Creating a hybrid vehicle involves private investors in the purchase of assets. Simultaneously easing mark-to-market accounting rules to allow banks with marked-to-myth assets to start taking some of the losses without having to take them all at once. Over the next six month it should help clarify who is toast and who isn't.
As for a nationalization, don't forget we're talking about $6 trillion of bank assets in the 4 largest BHCs now. Obama is right that magnitude it a problem. That's a lot of risk on the nation's balance sheet, especially since we will also take on the liabilities in order to prevent the financial system from collapsing. This is what the FDIC does when resolving any smaller bank failure. Roubini is right that the plan is to buy time, but waiting six months will not be as bad as Roubini suggests - Geithner may actually have the best possible plan under the circumstances.
As for people with underwater mortgages, two.five words: Mortgage Cram-downs.
If I need to show ONE post to a newbie to explain how cool and wise Nate is, this is the post.
If you or a loved one has been diagnosed with cancer, you know the feeling. You want someone to walk in and say, "oh, this is what we'll do and it will be OK." But they don't. Not because they are stupid, but because they are truthful. They tell you that we will first try this, and then try that. At each stage, the patient does all the work, not the doctor.
That is where we are folks. Our economy has cancer. Obama and Geithner are the docs. Let's do what they say, but know that we have to do the hard work.
I can't resist this. RonBurgundy keeps saying this isn't rocket science and then cites the Huffingtonpost? As much as I love Huff post, I would think someone who finds all this stuff so easy might have found a way to actually convince us of that fact by citing a few nuggets from his/her storehouse of wisdom. Personally, I think that Geither knows very well that some of those big banks are insolvent, but is he going to announce that on national tv? Because of the way these assets are packaged and resold over and over, it's very hard to know what the value of some of them are. But clearly he's got some ideas - in his "stress test." I bet every banker out there knows what that's going to mean. I agree that one cannot know exactly what the next step will be until we know more about who can and should survive. If Bank of America and Citibank can't survive, it's going to take a lot of thinking to put together a plan that makes sense for the economy, and I for one am pleased that Geithner seems to have both a large sense of responsibility to the people who would be affected by a premature judgment (namely, the public who depends on the bank) and also knows that if it's as bad as it could be, the solution will have to be drastic. I see no advantage at all to his announcing this solution now.
I think Obama set him up by promising specifics when that wasn't what he could deliver.
Patience, people, patience.
((((((Nate)))))))
I love you! You and Krugman always eat free at my place. All others pay cash.
The one thing I have a question about is the "also the stimulus" clause - I think I agree, but it's not as clear. That is, I agree that the less real stimulus they do - the less money they put in the pockets of the people who will spend it, the less they spend - everyone will lose, because we'll keep falling. The Repugnants and "moderates" have talked about it as if it's a matter of ideology (and they just can't stand that Krugman, shrill unreasonable hysteric - oh, er, top ranked economist - that he is). But it's not. The Democratic "ideology" isn't just morally right, it's economically right.
And as to the banks, who cares. I don't even know what ideology is in this case, I just know I don't want to be part of any revolution precipitated by total economic collapse and mass misery.
Once again, ((((Nate)))).
Oh, and PS, the reason I speak so confidently about what's economically right in the case of the stimulus is because in this case the economists seem to agree (and say it's not so complicated.) But, if I'm wrong, my bad!
mrseanpaul81 said...
Actually 100 - 99.999999 = 0.000001 * 300,000,000 = 300 americans qualify to talk about the issue according to Nate and that sounds about right
Try again, remember % implies divide by 100. Imagine if 1% were qualified, would that mean 300 million? I'd be very disappointed if Nate didn't know this basic math.
This is really dumb. To suggest that we leave it to experts entirely begs the question of who is an expert. Were you talking about the Conservative theorists or Keynsian experts? I seem to be hearing from experts that the stimulus isn't big enough or that it's not needed at all. Was the New Deal positive or negative? To which expert should we listen on this? Does an expert include that perceptions of fairness that a critical to a democracy? Is it right that Bank's should get bailed out and shareholders keep their equity while the small businessman or farmer loses everything for which he has worked because of circumstances created by the guys who are getting bailed out? Should we leave it to the experts who see that as OK because they THINK (but certainly don't know) that what they are proposing is right? Sweden bailed out the banks but the shareholders were wiped out as they should have been. You have no ability to decide who the experts here are. Geithner was head of the NY Fed and does not have an Ph.D in economics. He majored in Government in college and to suggest that the populus should shut up and leave it to papa is ridiculous.
ooo Nate, you've hit a nerve with some on the lunatic fringe
http://www.openleft.com/showDiary.do?diaryId=11545
http://www.mydd.com/story/2009/2/11/1300/19744
Good Job!
Geithner's plan has been described as the Bad Asset Relief Fund.
Sorry, he gets no points for "effort" or even good intentions. Bailing out hte banks without restructuring them is not even possible, much less wise.
Great post Nate!
Why isn't Krugman advising Obama front and center?
I agree about the wealth issue; for the last 8 years, plus Reagan, plus a good portion of in between, it's been all about redistributing wealth from the poor to the rich. You may call it trickle-down, but contracts were awarded to KBR et al., Inhofe/Crichton/24 were primary sources for global warming advice/torture policy (though that's not fair to 24, as the premise was warped and distorted to make the policy), a bankrupting war was started to give the president nearly absolute powers, etc. etc. This IS redistribution, and not robin hood but the reverse.
So let's give that guy Obama, who has proved over and over again that he is a better listener, thinker, synthesizer, than most of us, a chance to make it work and leave the enemy stuff to Limbaugh and Counter so they can make fools of themselves instead of us.
I love having a president I think is smarter than I am for a change!
RufusRules,
Thanks for the love. Berkeley wasn't great for some things (mainly my ability to heed Nancy Reagan's call to "Just say no!" to drugs and alcohol) but I wish I could have spent 20 years in that intellectual environment. Rather like this board at its best but with that special blend of beer, TopDog and contact highs that calls out to all loyal Sons of California.
Go Bears! Beat the 'furd!
Berkeley Bear,
Bockwurst with kraut & mustard late on a foggy night on Durant. Ain't nothin' better.
And we have the Axe!
You have a well spoken aire, Nate. But apparently you're missing the point. Obama is President only because of his speaking ability and political instincts, not his economic expertize. Also, as your fame is entirely due to the Obama phenom your objectivity is in doubt. I knew Obama was in the woods when he falsely accused anti-Vietnam war sentiment of resulting in people spitting on Vietnam war vets in his book Audacity of Hope. And when he gave Reagan false credit for turning around things (I lived those years as a worker, he was just a kid.) but us veterans of the Culture Wars gave ourselves hope that the new kid would do better. Now we're distressed that our votes went for naught. Those on the blogs who know better knew Obama was in the woods with the wolves when he picked scum like Bob Rubin, Larry Summers and others of such ilk to advise him. No wonder Krugman, Yves Smith, Roubini, Dean and many others are getting very worried and concerned about Obama's drift.
Now we know we are lost unless Obama goes his own way against the tide of some of the worst offenders who've caused this crisis. Obama will be the new Hoover soon enough if he continues to follow such advise that Summer's dispenses. Volker's not much better as he sunk Jimmy Carter with his antiInflation tactics that help elect the worst President imo, Reagan. The majority of the faculty at Harvard became experts on Larry Summers and that's why they threw him out. So what are we to say about Obama when he spits on Howard Dean, who led the way for his election and takes someone as evil as Summers as his guide? Summers was an advocate for shock therapy for the USSR that led to Putin...and shortened the lives of millions of Russians in the process. We, the Americans, are in for the same.
Where are the benefits for the millions of new unemployed? The stimulus only offers a pittance. Where's the new wpa or ccc? Hoover actually tried to do more for ordinary people than Obama's doing. It's mostly a giveaway to the already bloated health care industry and already large concerns that'll maybe add at most a half million new jobs while we'll be losing 10 million this year alone. And more giveaways to Bob Rubin's (and hank paulson's) friends in Wall Street? Give us a break!
Chuck Tood of NBC on Meet the Press nailed Obama at the onset. He said "Obama is an appeaser". Chuck got him in one word.
There's nothing asinine in suggesting that Geithner thinks that what's good for wall Street is good for America. Or in saying that he is wrong about that.
Obama ran and won on "change." He then gave the Treasury job to one of the three people most involved in the Bush Administration's failed policies. How is that a change?
It's obvious that within the Administration there is a faction that thinks Wall Street has to be bailed out to save the economy and another faction which thinks it needs to be radically reformed.
The people who supported Obama in the primaries mostly are in the second group. But now he's got the job, he is siding with the friends of Wall Street.
That ought to worry everyone
Nate assumes that, after much thrashing, experts can come to a consensus. There is a great deal of economic research, but I find that consensus is lacking. Given that, whatever policy is pursued cannot fail to be one that is substantially political.
Yes, I have my partiallity for Keynesian approaches--but I don't doubt that insights from "the other side"--neoclassical and growth approaches--also have insights. consensus is a chimera, not just for congress or the country but also for economists and policy makers.
"Anyone who is professing with certainty that this or that will work -- nationalizing the banks, for instance -- is an idiot."
I would hardly call Nouriel Roubini an "idiot." Ditto the head of the IMF. Ditto Martin Wolf. Ditto a whole lot of people whose field IS ECONOMICS.
No one can ever guarantee than anything will work. They can, however tell with a great deal of assurance what will NOT work - and that means the 'bad bank' even with the quasi-public/private funds; and doing what Japan did and keep propping up zombie banks. And that is exactly what Obama and Geithner are doing.
YOur over-the-top hyperbole discredits what you have to say.
Grow up.
Dear Nate,
Why is it that helping people in the economy means first helping the wealthy, powerful and well-connected first and then having it trickle down to the people who really need the help?
It seems you are reflexively defending Geithner. Have you read any of Dean Baker on this subject? I would be much more confident of real help to the people if he was Treasury Secretary.
Sincerely,
Jeffrey Stewart
Dear Nate,
Geez, if you listened to the people that said leaving blogging to the experts, where would you and 538 be?
Sincerely,
Jeffrey Stewart
@AnnS: you don't do yourself proud with your selective reading.
Nate is saying simply that there is a lot of uncertainty about what will work in this situation. And that anyone who says "X will work" OR "X won't work" without regard to the uncertainty is wrong-headed.
By pointing out that Roubini et al. are smart, you aren't contradicting Nate. You are in fact concurring with him that even smart people can't be 100% certain -- either about what will work or what won't work (unless, of course, the "won't work" ideas are simply banal or irrelevant, e.g., jawboning instead of making policy and supporting programs.).
In short, it's dogmatic thinking -- on the left or the right, or in between -- that's wrong-headed now.
Kasandra said...
Geithner's plan has been described as the Bad Asset Relief Fund
Described as that by whom?
Lush Rimbaugh?
Bill O'LIElly?
The 'whiz kids' (and I do mean KIDS' on Faux News?
Nate,
As a former Wall Streeter i gotta see your read on this one is wrong. It really is not a conflict between knowing what's goping to happen to the economy. Rather, it is a fundamental understanding of knowing for a fact what is wrong with our financial markets.
The current structure of our capital markets is a mess. the banks and the incentive structures that drive them are completely divorced from reality. Why people opine with certainty that many of these plans simply will not work is because we have seen first hand the house of cards that our financial system is built on.
We simply recognize that there needs to be a major restructuring of the banking system. For all intents and purposes most of our major banks are presently insolvent. All the current financial stability plans do is push of the reckoning for another year or two.
Again there is a big difference between economic forecasts and an assessment of finnacial health of of our financial system. It is clear to many how severe their predicament is. The extent to which this will lead to big meltdown to our economy or a major meltdown is the only issue for debate.
I am a slowly converted fan of your work, but you cant wande into something like this with comments such as " My anecdotal experience for the past several months". There are some real and quantifiable land mines out there.
you fucking socialists. move to france already
The problem is that even among the experts there is and will be no consensus. On the right is the Chicago/Austrian school and on the left is are the Keynsians. Since economics- no matter how many mathematical models they bring to bare- is a social science, there will never be any absolute resolutions or consensus. And never shall the 'twain meet.
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