The horizon is not so far as we can see, but as far as we can imagine

The difference in opinion about whether the Geithner Plan will work is not about “faith”

Matt Yglesias tries to sum up the differences between critics and supporters of the bailout plan:

The more I’ve followed the back-and-forth on this, the less actual disagreement about the facts I think I’m hearing. What the critics are saying is that Geithner’s plan couldn’t possibly recapitalize the banks in an adequate way unless it was implemented as a horrible giveaways. What the defenders are saying is that if you implement the plan the correct way, it will be a helpful step toward resolving the situation at a time when it’s difficult to imagine the congress appropriating the volume of extra funds necessary to full resolve the issue.

Ultimately, these two points aren’t in conflict with one another. They’re different interpretations of the situation that are based on different assumptions about the competence and good will of the people involved. If you assume that the key policymakers are smart people doing their best, then you’re going to line up with Spence. You’ll predict a degree of success from the Geithner Plan followed by the need for additional action. And you’ll be concerned that over-the-top criticism of Geithner and the Treasury Team is going to undermine the political support that will be needed for further action. But if you assume that the key policymakers are inept, or unduly under the sway of big finance, you’ll see that a sound implementation of the Geithner Plan wouldn’t generate the needed volume of money, so the plan “must” be for a large giveaway.

What?  No, Matt, what the critics are saying is that if you’re going to recapitalize the banks there are ways to do it that aren’t nearly as horrible giveaways at the way that Geithner and Obama chose to do it.  The plan is a horrible giveaway.  This is not in question, it is simply a matter of fact.  What wouldn’t be as much of a giveaway was, oh, nationalizing the banks; or pushing them into receivership so the bondholders take a haircut and the stockholders are wiped out.  In that case either the government would have all the upside (nationalization) or less money would be required (receivership.)  Either way, better for taxpayers.

We also note is that if you want to start lending back up there are simpler ways to do it than throwing money at the banks—take them over, recapitalize and lend. Or just have the Fed lend directly to consumers and businesses.

We likewise note that the effects of this plan will probably be similar to what happened to Japan after its bubble burst.  The technical details may be different about what’s being done, but the end effect of huge amounts of debt hangover depressing the economy are likely to be depressingly similar.

And why wouldn’t we assume that the key policymakers aren’t inept?  Both Geithner and Summers didn’t see this coming, even though plenty of other peole did.  They are perfect in their records of calling the economy and the market wrong.

This isn’t just about whether you think the key actors are competent individuals operating in good faith, though that’s part of it. It’s about the fact that many of us think there are better options available than the Geithner plan.  However what those options all have in common is that the people in charge of the banks right now don’t come out the end as powerful, rich or well paid.

Since those options are better except for this one difference, we think that that difference must be, as the saying goes “not a bug, but a feature”.

This is not just a difference based on, as Chris Bowers suggest, trust or distrust, it is also based on fundamentally different ideas about how the government should work, who it should take care of first and how the economy operates best.

Some of us just don’t believe in privatizing profits, socializing losses and leaving the same group of people in charge who caused the disaster.  And at the end of the day, say what you will, that’s what this plan does.


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  1. John B.

    ” Some of us just don’t believe in privatizing profits, socializing losses and leaving the same group of people in charge who caused the disaster. And at the end of the day, say what you will, that’s what this plan does.”
    Boy, you got that right…and that is what is so freaking depressing about all of this…a lot of rules for thee, but not for me coming from the wise leaders who are telling us that they are looking after this mess…
    Until the market and our leaders are credible and until poeple who committed fraud and other high crimes and misdemeanors are arrested and put injail, there will be no credibility not only for the markets but for our political system as well.

  2. Well This Sucks

    US Federal Reserve has told banks to keep quiet on the results of “stress tests” that will gauge their ability to weather the recession

    Scarecrow: I once naively thought bank executives are under a fiduciary obligation to shareholders, creditors and other investors to disclose information material to the financial condition of their banks whenever they make pronouncements of such financial conditions, as in a quarterly earnings statement. In other words, they’re not supposed to lie or mislead people. And there’s the minor matter of being honest with American taxpayers who are being asked to bail out these same banks for hundreds of billions of dollars.

    But apparently our government thinks that the only way for our banking system to hold together is for the executives of the 19 most important banks in the US to mislead everyone. And this is supposed to reassure us? I don’t know what to say.

  3. jo6pac

    Some day they will run out of Smoke and Mirrors but in the mean time it’s another uncle milton plan from hell.

  4. I’m a bit surprised that Matt Y. got this so wrong. He’s usually not that careless, at least in my limited experience.

    jo6pac – Don’t bet on it. The old saying that no one ever went broke underestimating the American public is at least as true as ever.

  5. jo6pac

    Cujo359 Thanks for the laugh, so true.

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