This editorial seems to pretty reasonably explain the current mess and why Geithner may be reacting the way he is- he has no good options.
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by John Cole| 35 Comments
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This editorial seems to pretty reasonably explain the current mess and why Geithner may be reacting the way he is- he has no good options.
Comments are closed.
We’re all doomed.
@Atanarjuat: Every so often you make sense.
A decent editorial overall, and pretty much what I’ve been thinking recently – we’re screwed.
OTOH, I love how the solution comes down to putting a Republican in charge. Or maybe a blue ribbon commission. The outline of the problems we’re facing is very well done, but the proposed "solution" is kind of silly.
Thank you, JL.
I fear that America may become a coast-to-coast Calcutta, and the children of that future will think that L.L. Bean catalogs are fairy tale books, since no one could ever have possibly lived with such comfort and riches (one family in one house? And everyone clothed? Ridiculous!).
Despite the stalwart opposition of the Republican party, I think it’s too late to stop, much less reverse the socialist leviathan that’s bearing down on us all. Too many years of not investing in the long term and only focusing on short term gratification has led to this tipping point that the entire nation now finds itself on.
It’s truly fucking depressing.
James Baker? Bill Bradley? Seriously? That’s his answer to this clusterf**k? Christ on a cracker, we are all well and truly screwed. Heckuva job, Wall Street!
This whole mess is due to a legal concept called ‘Plausible Deniability’. Every corporate and bank crook (i.e. republican supporter) rapes all the loot they can by shady and down right criminal methods (credit swap, and similar paper transactions that they skim money off but transfer risk to the taxpayer) but are protected by this nonsense of claiming this legal fig-leaf. This is robbery worse than any I’ve seen but these corrupt pigs that support ‘capitalism’ for their profit, but risk for the poor and middle class vis taxes are little more than robber barons that through careful inbreeding, continue to plague us.
Of course. Because it is not like Volker is available.
@Atanarjuat: Now we disagree. Rather than a band aid approach, President Obama will try to fix the situation so it does not happen again. IMO re-election is of less importance than doing what’s right. Since Citi is a multi national company, just shuttering the doors won’t work.
Paradigm shift. The sun will still come out once this is over, and yes, it will probably will mean socialism. If it does, it’s because it’s the next stage in the natural evolution in modes of production.
At this point, can anyone see a return to the status quo ante? Can anyone say that all this deregulation and financial scheming was not the natural reaction to the demands of increasing populations and the need to keep more and more people under the delusion that modernity, capitalism and prosperity would just go on forever? That everyone could have everything, that everyone could be rich?
It was a system run on paper fantasies. It collapsed and isn’t coming back. It will be replaced by something historically determined, something that will be fairer and more humane.
What’s wrong with that?
When you guys were all calling for Geithner to resign I tried to tell you to calm down and give the man a break, but nooooo…
Anyways, Geithner is like that poor Russian general from back in the day tasked with stopping Genghis Khan as he tears across the steppes. Great time for a promotion.
More like a guy in a burning building with his balls nailed to a china cabinet.
Even Sam Malone has been laid off from Cheers.
Guy’s full of it.
Nationalization might not be a good option, but it’s still the best option.
It’s been blindingly obvious for some time now that there are no good options, but Geithner is obliged to take the least-bad option, and everything he’s doing now is just stalling. Nationalize, get the losses written down, and rebuild the whole mess from the ground up if need be.
Politically, everybody is already broke. Obama doesn’t have to completely restore prosperity in the next two years or so, he just has to make it clear that the foundation and framing for a real recovery and real wealth-building has been put back into place.
Take the fucking medicine already.
Note here that the chairman of the FDIC has doubts about whether taking over Citibank is even possible.
The best solution I can think of is for Dems (Obama and congressional leadership) to allow the GOP to put whatever their alternative is to come to the floor for debate. Whether it’s tax cuts or a plan to let BoA and Citi fail or to let GM wither away, it will inevitably send the markets plummeting in response to that sort of insanity coming closer to reality. It’ll never get to a vote, and Obama can move forward with a nationalization plan or equivalent without drawing as much GOP fire for the massive amount of debt that’d be incurred. The best thing that happened for the Dem leadership, Obama, and Bush was having TARP fail on the first try — the resulting crash showed what was at stake and made seemingly sensible ideas from the opposition ("Don’t give money to those cheating bankers!") look dangerous. Something like that needs to happen now, because Obama would be able to act with much more authority if folks realized the danger of doing nothing.
Shorter: Geithner can’t do what he wants/needs to do because it costs too much. He can’t do the fair thing (let the banks collapse) because it would take down the whole economy. Show folks that what’s fair isn’t an option, and nationalization (w/ some debt assumption) becomes much easier.
The article suggests that nationalization wouldn’t cost the taxpayers anything, but nationalizing them would mean we took on the banks debts as well as their liabilities. Which debts we would honor would be a separate question; Krugman feels we should honor all of them, but also says he open to argument. I find the knowledge that each of us is already paying hundreds of dollars to people who took out insurance on their risky investments with AIG to be absolutely galling. But regardless, who gets protected is an independent question from nationalization.
Aside from that, the article seems consistent with everything else I’ve read. It’s been obvious for months that we have "no good options," but that doesn’t mean that some options aren’t less bad than others. So far it looks like we’re doing what humans normally do in a situation like this; selecting the option that involves the least short-term pain, with a possibility of minimal long term pain if we’re very lucky, but the potential for a great deal of long term pain if it doesn’t work. It seems like we’re hoping the market rebounds soon enough to spare us the pain of making a decision. But then how is the market going to rebound until people can trust the banks again? It’s a chicken and egg dilemma.
And I do say it "seems like" we’re hoping, because as some have pointed out, if we really were going to take over the banks, the administration wouldn’t telegraph it. The Republicans can pontificate how we need to shut the banks down; that’s the advantage of being out of power. Maybe it makes sense politically to dither, to get the Republicans to start screaming we need to shut the banks down. Because you know if we did it now, they would be screaming bloody murder at the top of their lungs about how irresponsible and dangerous the administration was, nationalizing the banks. Just imagine how they’re screaming now over letting the Bush tax cuts expire times 100. So patiently wait until the Republicans are all accusing the administration of sitting on their hands and propping up the banking system and how we need to let them fail, and then they’ll have no room to maneuver when the administration does what they said they wanted it to do. Of course they’ll try and pretend they weren’t really for closing them down, or they wanted to do it differently, or why didn’t the administration include them in their planning, but they’ll look ridiculous. I actually doubt this is what’s going on, Geitner seems sincere to me in his attempts to prop up the markets. Also conservatives in congress won’t let themselves be pinned down. Even now they’re for letting the banks fail and against nationalization, and we’re having to guess to figure out what they have in mind. Some reporter ought to ask them what they mean by letting the banks fail: would they go into receivership? Would we the taxpayers take on their debts and obligations? Or would bond holders be stiffed? I doubt very much they’ve even thought through these questions; they’re just blustering, saying whatever they think what sounds most principled and conservative, and if asked questions with no obviously good answers, they’ll sputter and blow smoke. But these are the obvious follow-up questions to their declaration we should let the banks fail, and reporters should ask them that. It’s times like this I wish we had a competent press.
Finally, here’s the Fresh Air interview I linked to previously, Simon Johnson arguing we should take over the banks and how we should do it.
Wile E. Quixote
Have credit default swaps been banned yet?
@Wile E. Quixote
Issuing credit default swaps depends on the AAA rating of the issuer. I don’t think AIG’s rating is so terrific just now.
Oh, please. Credit Default Swaps are insurance policies, aren’t they? Why not just let them lapse. Don’t insurance companies thrive on lapsed policies? Worst case. Make them return the premiums.
Sure the bond market would take a hit but that is already happening.
The Moar You Know
Great. Geithner is terrified of being the guy who yanks out the last Jenga block. The Republicans are helping out, and are busy standing up for the rights of frozen cells.
Somebody wake me when either party gets serious about governance.
@Emma Zahn: No, they are not. More of a bet. And then, once the bet is made and accepted, the covered party could declare the "bet" as a secured asset.
Also, thanks to the 2005 bankruptcy law, they cannot be discharged in bankruptcy and they automatically become the "first creditor" – they must be paid before anyone else is.
You may begin to see the scope of the problem. Bets are counted as real assets. A lot of the financial system does not have the value that everyone thinks it does. Which will pose a real problem if you wake up one day and your 401k equals zero dollars. Or your savings account. Or your checking account. This could really happen, by the way. It’s why Geithner is scared shitless to do anything.
@The Moar You Know:
I am still floored that number one, banks were allowed to accumulate these things and count them as real assets, and number 2, we the tax payers are covering these bad bets through the bail out of firms like AIG. It is insanity.
#17 Rick Taylor
Great post. Agree with your assessment that Geithner/Obama is probably setting up the politics for this as you say (called dithering by some). If the stakes weren’t so high and the danger so palpable, I would enjoy the politics of it more. Instead it just makes for anxiety strangely mixed with a type of surreal detachment.
Americans and the world are in for some very challenging times. The speed to which we have to adapt to big changes is the critical piece. Though the changes that we need to make (based on decisions) need to be made soon – for the "best" outcome, paradoxically, the change that would be best for the people should come slowly to avoid the most suffering and potential unrest. Not clear how that can best be managed..
Right now people are still carying on almost as though nothing has happened. There are still "reality shows" pumping how the elite live and a bunch of crap from the time before this.
I am flipping between looking at my garage as a potential chicken coop to thinking things will proceed pretty much normally for a while yet. Who knows?
Why are czars so in fashion in everything?
What is this we, emergency food supply Menchi?
The Cat Who Would Be Tunch
@Rick Taylor: Even more insane is the fact that these companies didn’t bother with pesky capital requirements. I mean, how could all these financial instruments and institutions possibly fail?
In other news, the state of NY is looking to put in regulations for the CDS market which will include provisions for capital requirements. They started this in January 2009.
Let’s say you have cancer and the doctor tells you the options are radiation treatment, chemotherapy and radical surgery. There are no good options, right? So if you do nothing you die, friend. You need to choose one of the bad options. Suck it up and do something. Just dithering around complaining about there not being any good options will result in the worst option of all.
"Oh poor me, there aren’t any good options." Jeez.
Bill [email protected] 27
Your cancer treatment analysis is pretty good but this differs in that the politics are a very real consideration that don’t really have an analogy in the medical frame…Politics are like the "dark matter" in the universe — you can’t always see it but it actually determines whether there is enough mass to either expand or contract the universe — so it matters a lot…
You have to set up your shots for decisions with such huge implications. The "set up" has both active (say this, do that) and passive (waiting, behind the scenes maneuvers, letting some other event ocurr). You also look for certain markers for when to trigger certain activity trains…for example, nationalization would require a number of people and processes to be in place to make it go and as others upstring have indicated, won’t be announced in advance necessarily.
Just saying — just because people don’t see something happening does not mean nothing is happening and decisions are not being made.
Over at Baseline Scenario — those damn bloggers! — the ensuing financial complexity resulting from credit default swaps was termed the ultimate rent seeking. And it is. And if any one firm can bring down global finance — one f*cking firm — then global finance needs to be immediately restructured, not ‘let’s wait, dump a bunch more money in and see if the system corrects itself using the same management’.
It’s not going to any get easier going forward, but it is going to get a lot uglier.
Yes, Geithner has been responsible for taking steps to regulate credit default swaps. That is good and to his credit.
But from his actions Geithner also believes unregulated default swaps should be honored, no matter what the damage to the taxpayer. That is unacceptable.
About options. I have yet to see anyone say the taxpayer won’t lose, or that there is a painless option, so that’s a poor excuse for inactivity. A lot of the original TARP money, and money paid to AIG, is gone, and won’t be repaid. I see the options going forward as financial industry restructuring, regulation, and downsizing the role in the economy — combined with who bears the majority of the money loss, either mismanaged firms and their clients, or the rest of the country. The latter question should be a no brainer, and because it’s not, I don’t feel any sympathy whatsoever for the plight of Geithner.
If there were no political considerations at stake, I truly believe Geithner, like Paulson, would have just outright purchased any and all trash assets to make the financial industry whole, regardless of cost to taxpayer. Geithner’s defender may disagree, but I do see him having a central bank mentality. This ‘financial industry is more important than people’ worldview will eventually reflect badly on the President also.
I recently read some fanciful theory — perhaps here — that Geithner was being set up by Obama to be a patsy once all the mechanisms were in place for vigorous financial reform. Honestly, that would be beautiful if it were true, but I don’t see it.
Though I think that you are largely correct that no matter what, there is no pain-free solution — I DO disagree that it does matter how we "just do it" — its those damned devilish details and their impacts that I know those of us outside of the administration or system only know generally or specific pieces of a specialized section. None of us has responsibility for the whole of the impact and for that reason we need to be mindful and at least give a nod to a more complex set of considerations than just "do it since we are all going to suffer anyway"…
Can we really afford the irritability of impatience to just have a decision…can we not understand at least in theory, the occasional need for strategic uncertainty?
Not saying that I differ from your conclusion of what is ultimately needed or that Geithner may not be a tool — just that how this is rolled out may have considerations that I have not taken into account that may be quite important.
In any case, Obama, not Geithner is where the buck stops. HOW anything is done or not done and the outcome is his —
He does not strike me as a naif nor as hidebound to the capitalist frame that he will not accept other evolutions..
Just this: Not all parts of the wheel hit the ground at the same time…
if there are no good options, then why can’t we let justice instead of pragmatism guide our response to the financial crisis?
i mean, the house of cards is going to fall, right? we’ve been dithering and hemming and hawing and such for weeks, months, now, hoping somebody has a lightbulb go off over their head and comes up with the magic answer that saves the day and lets us all go back to the magical wonderland we lived in up until a couple of years ago, where everything but wages experienced a double-digit rise every year and we were all going to get rich flipping houses or buying tech stocks and the neverending gusher of oil from poorer nations we could stomp all over with our awesome military whenever they got uppity or we just felt like it would keep our hummers and suburbans commuting back and forth to the ‘burbs that would sprawl as far as the eye could see from the high ground we would never have to retreat to because the oceans were definitely not going to rise, at least not enough to swamp our coastal cities, which were filled with latte-sipping elites anyway, so who cared?
unregulated market-evangelistic capitalism had a good run, but it’s pretty obvious by now that it wasn’t the way, the light, and the truth. mammon is simply not a worship-worthy god, and even if you take care of him, he isn’t going to take care of you (an experience not unlike waiting on a wealthy person at a restaurant).
so, as we plot the course forward, if there’s no way to avoid the rocks the masters of the universe have steered us onto, shouldn’t we at least see to it that they get wiped out along with the rest of us? and yes, i understand that dinging the bondholders along with the credit default swappers would clean out many worthy investors and regular people, but for those of us that think some kind of modified socialism, where, say, a baseline comfortable existence is guaranteed, which the ambitious and those otherwise desirous of greater prosperity could build on and out-earn should they choose, is the way forward anyway, it seems to me that putting everybody in something like the same straits to begin with just makes it that much easier.
if, at the end of the day, the people who made the bad choices that landed all of us in this totally fucked-up situation don’t suffer the same consequences as the rest of us, not only will i be outraged because of the injustice and unfairness of it all, i think we will have squandered the opportunity to evolve as a society into a better, more just, more harmonious configuration (and resource-allocation scheme). that there will be pain between now and whatever comes next is inescapable. so let’s make sure where we end up is better than where we came from.
Appears to me this article is one big strawman. Lehman Bros was allowed to fail, letting the CDS’s kick in and kick off the global meltdown. Nationalizing a bank means precisely to not let it fail, but keeping it afloat – which is what Geithner is doing now, except without lavishly rewarding shareholders and executives. Nothing’s more trustworthy in this economic environment than a nationalized bank, after all. So lip music to thee.
I certainly hope you’re right (not being sarcastic, either). I don’t want President Obama to fail.
However, what I am mindful of — constantly — is that it’s easy for non- Republicans to blame the Republicans for everything economically. And that narrative works (mostly) in the US.
But, "left-leaning" governments in Europe (I’m thinking the UK and Spain as primary examples) also have corrupt, over-leveraged, and failing financial industries — to a certain extent, the ruling parties, no matter what the ideological label, have bought into the same economic worldview.
I think the President is an intelligent man. We also had another president, who was also intelligent, also a former law professor, also a Democrat, preside over the dismantling of a lot of financial regulations and worker protections. That was Bill Clinton. Yes I voted for him twice, and he was neither a socialist nor murderer, (if only the current President looked as if he had killed someone, the circle would be complete) — but he picked individuals like Larry Summers and Robert Rubin to implement his economic policies, and at the end of the day, both supported reckless finance, right there with the Republicans — hell, right there with Phil Gramm. And there are Democratic leaders who probably want other Democrats to forget that.
I might get some hateful comments for this, but a lot of Clinton’s expansion was also debt fueled. I really do think we are rolling back two or three decades of gains.
Anyway, I don’t have a visceral hatred for Geithner. However, I don’t feel slapping a ‘Democrat’ label on any financial leader is going to suddenly make him a man of the people, so I really think intense public pressure will be required for true financial reform.
I share some of your perceptions about Clinton and what has been labeled as Democratic and therefore must be right shtick— been there…that is not me.
That said, I am a realist. In any big plan or undertaking, you start with where you are realistically, and then try to plan where you have to get to. There are steps in between and some heavy considerations in some dangerous situations – like this.
What I find somewhat frustrating about much of the critique from my friends on the left (with which I share much of my social and political values), is a pretty dim understanding (respect?) of getting from here to there.
Even if Obama was the most ardent leftist – unless he was a complete nihilist/anarchist, he would have some obligation to make the transition from the system that he was in to the other desired system through some sort of step wise process or progression, exploiting what he could of the current system and its resources before completely abandoning it to the next progression. That would hopefully be as orderly as possible. Remember, this is not the conqueror after a World War with the former regime heads dead or on the run…
They are still here
and still "armed" so to speak and entrenched for the time being within the current power and political structure. We already have seen how dangerous they are in their incredible incompetence in destroying the system that benefitted their own ends! They cannot be trusted but they must be manipulated and used.
So yes, distrust, yes verify, be suspicious. But acknowledge that unless you are an anarchist, there is complete necessity for mystery, misdirection and subtlety in accomplishing a safe transit across the dangerous couloir.
Recommend a great book:
by Richard Gonzales. The focus is those who survive incredible situations in the out of doors and what separates those who do from those who do not…not perfect but definitely some applications for this situation. First step is to get in the NOW — not what should have been, not where you wish it would be, but NOW…
Uh . . . how, pray tell, do you "nationalize" a multi-national? Citigroup has a good part of its assets and operations outside of the US. Taking it over would require international cooperation on a level comparable to WWII . . . with the Axis powers cooperating with the Allies.
See #1 above.
(Lucky for me, I invested in those "anytime" stamps the USPS issued a few years back. They’ll hold their value for years to come if there’s mail service.)