The Obama administration needs to get their shit together on the banking problem. They leaked details of the toxic-asset plan to the New York Times and let it be known that more details will be forthcoming as soon as Monday. But they got no thanks for it from the left. The plans (at least the parts divulged by The Times) have been blasted by Paul Krugman (once), Paul Krugman (twice), James Galbraith, Calculated Risk, Yves Smith, Loretta Kane, European Tribune, Ian Welsh, Dean Baker, and Atrios, for starters.
The general criticism is the same. Secretary Geithner is erroneously building his plan on the assumption that the toxic assets currently have a fire-sale value that will rise when the panic subsides. But, the criticism argues, the housing bubble has burst for good and current market values reflect not a panic but a basically accurate assessment of their real long-term value.
If housing prices don’t rise or, worse, continue to decline, the toxic assets will remain toxic or become more so. And if this is true then Geithner’s assumptions are wrong and his plan will result in a massive and permanent loss of taxpayer dollars.
At this point the focal point of criticism diverges. Some emphasize that Geithner’s plan will restore banks but not lending. Others emphasize that the plan will allow rich hedge-fund investors to gamble with the public’s money (they can win, but they can’t lose). Others think the plan might work but at unacceptable risk to the taxpayers. Others just want to nationalize the banks, fire all the executives, and deal with the fallout…come what may.
The immediate problem is that the Obama administration is allowing this debate to go on on these terms (with incomplete information) a full two-days before they are prepared to roll out their plan and their justifications for the plan. As far as I can tell, there was a leak to the New York Times but no outreach to the blogosphere (or Krugman) to tell their side of the story. That leaves them open to blistering and predictable attack from the Left at the very moment the Congress is seized with populist furor and the Republicans are looking for every opening to attack.
Regardless of the merits of the plan, this is not a good situation. My advice to the White House is to spend Saturday night and all day Sunday reaching out to their critics and explaining their side of the story. As Sonny Corleone said in The Godfather, come Monday, “…I want somebody good – and I mean very good – to plant that gun. I don’t want my brother coming out of that toilet with just his dick in his hands, alright?”
Because, right now, that looks like about all Geithner will have.
Honestly, it’s all about the merits of the plan. If the plan is good, it can and will be defended. In that case, why will it matter a week from now if the reviews today and tomorrow are bad? Surely, a meritorious plan will have its defenders too, even if the administration does not make an attempt to curry favor with a particular crowd.
On the other hand, if the plan is a poor one, well then the criticism was inevitable anyway.
I will note, though, that I assume the leaks of the plan ahead of time have some purpose. Perhaps the administration expected a more favorable response. Perhaps elements of the plan are a trial balloon. Or maybe I’m wrong and there is no purpose at all.
Like it or not, the activist left listens to left-wing bloggers. And the administration is taking a bruising on their floated plan. They would be foolish to let this go on for the next 48 hours because they’ll get blasted by Congress on Monday from all sides if they don’t change this dynamic. Maybe their plan just sucks, but they do plan on defending it, right? Well, they should get on it.
I’m still scratching my head at the idea that the administration leaked details, with no effort at defending the plan, as you assume.
Do you agree that the leak-without-defense was a planned move? It seems very unlikely to me that it was just a matter of happenstance, without careful thinking.
So, why do it this way? Is it possible that the administration wants to hear some initial criticisms in order to anticipate and prepare for the full-fledged debut of the plan?
I’m just speculating, and would like to hear from someone with more inside-baseball knowledge.
I haven’t heard a peep from the Obama administration and it doesn’t appear anyone else has. I haven’t had the teevee on today, so I don’t know if they have people on there defending the plan, but I don’t think so.
I think they just screwed up here.
Ask the President
But Boo .. even sites like Calculated Risk .. and John Cole .. who aren’t DFH’s are panning the program .. and I haven’t seen what Roubini has to say about it .. but anything where the taxpayer is asked to burden almost all the risk is a sure loser
I’m not sure if this plan is a good one or not. Are they trying to artificially re-inflate the bubble? That strikes me as trying to create a market for these securities. Which means that this game continues without any changes in regulations.
Part of me wants AIG to no longer exist in any form. Let someone else take their business.
It’s a difficult thing to define.
An effort to create a market for toxic assets that prices them about thirty cents on the dollar can be argued to be inflating the bubble or it can be argued to be intervening to avert a panic.
Depending on the ultimate price, it could wind up being one or the other.
I agree, it is all about the plan. If it is a good plan, then maybe a conference telephone briefing would help. But if it is not a good plan, then a blogger briefing would have no impact. Frankly, I don’t think it is a good plan. The sooner Obama throws Larry & Tim under the bus, the better it will be for everyone.
We are talking about the celebrity press corps, this is not a feed them shrimp situation.
we are NOT talking about the celebrity press corp
preview is our friend.
Another naysayer.
Here’s the problem the administration has – and why calling up a bunch of critics and trying to defend the plan won’t work:
This is an argument about basic, underlying assumptions. Geithner has a set of assumptions about where the market should be, and the critics have a different set of assumptions. If you believe Geithner’s assumptions, this might be a decent plan – but none of the critics you listed here believe his assumptions.
So he can’t do what you say because there’s no way to prove his assumptions are more correct than theirs until the crisis is averted and people can look back to assess the historical data. That’s actually one of the problems right now – if we knew whether the assets had truly lost value or whether they had just lost the “confidence” of the market and were undervalued, we wouldn’t even be having this discussion.
At best Geithner’s going to look like a moron if he goes out in public to try to defend the plan from this criticism because his defense is going to be “the holdings are undervalued”, his critics will say “you don’t know that” and no one gets anywhere. Worst case he’ll drive down what little confidence there is in him to zero and Congress will step in to block him from enacting it.
(Frankly I don’t get why he’d want to float a plan that is, essentially, “keep doing what we’ve been doing but more” right now. You’d think in this environment such a thing would be toxic.)
well, I agree with you.
But, off the top of my head I can think of several points they could be making. For example, this part is being universally ignored by the blogosphere:
I literally have not seen one recognition of those facts in any commentary today.
You may not be seeing acknowledgement of this because there’s nothing extraordinary about it, and the interest payments are most likely not sufficient considering the risk that these “loans” won’t be repaid. Aren’t the rates rather low?
Low interest rates on money that Wall Street is simply going to use to go gambling is not really a highlight, IMO. Maybe I’m wrong about the details here.
And as I suspected, the reason why nobody in the blogosphere cares about the interest payments is that it’s a pittance compared to the risks we’re being asked to take:
“Note that even a small loss of capital, relative to the purchase price, completely wipes out the interest earnings on the Treasury’s loans, putting the government in a loss position and giving the banks a windfall.”
LINK. Note that this is the Galbraith article that you yourself linked to, Booman.
To add – I find the arguments from the critic’s point of view (that the assets really have lost value) to be far, far more convincing than the idea that these assets really are worth more than the market thinks. The values of the underlying property in home mortgages were inflated – as EVERYONE has been talking about for a number of years with the discrepancy between the cost of renting and the cost of buying. It was a bubble – that pretty much means that things were over-valued by definition. And on top of that we have to worry about whether a Credit Default Swap or a Collateralised Debt Obligation or some other fancy financial instrument has lost its arcane and possibly fictitious value. That just makes the idea that this stuff is “undervalued” by the market too incredible to be believable right now.
Okay, but hold on…
Remember that the formula everyone is using is this:
Market value= .30/dollar
Banks want= .60/dollar
So, we’re not debating whether the housing bubble burst or not. We’re debating (for simplicity’s sake) whether the default rate is going to be 70 percent or 40 percent.
Geithner is not betting that the rate will be 40% or lower, he’s betting that it will be substantially lower than 70%.
Also, to the extent that his actions improve the lending situation and that the stimulus improves the jobs situation, he hopes to improve the rate of defaults from where it is today or would be if he did nothing.
So, we’re not really debating whether the bubble can or should be fully inflated, because everyone concedes at least a 40% loss off the bubble.
Right. But – Geithner (and really Treasury in general since Paulson) hasn’t done anything to explain why they think that the market value is going to be substantially lower than 70%. This would be important even if the assets were comprehensible to mere mortals, but when you include these stupid financial implements that require complex statistical models to even explain who owes what to whom, it becomes even more important. It could very well be that the market is currently OVERVALUING them and they’re worth less than .30 on the dollar because the market is building in a likelihood that the government is going to pay an overvalued rate for trash.
Part of the problem is that it looks from the outside like they’re deriving the numbers backwards – that they’re looking at how much money is needed to save the banks from going under and then saying that the market is undervaluing them by an amount that gets them to that dollar amount, rather that giving any kind of rationale for where they’re getting their numbers from. I’m not saying that that’s what they’re actually doing – I’m saying that’s what it looks like they’re doing. Unless they open this whole thing up to more transparency, they’re going to be viewed with suspicion by the taxpayers.
Of course, transparency is anathema to US banks and financiers – who absolutely HATE being told to show their work to the public and pay big money to Congressional campaigns to make sure that laws are written in such a way that they don’t have to do it. So I doubt we’ll be able to get the levels of transparency we really need to rebuild the trust because the bankers would probably rather run their banks into the ground than submit to that level of oversight.
Grr – I meant “hasn’t done anything to explain why they think that the default rate is going to be substantially lower than 70%.”
Unfortunately, I have to agree with you.
Remember that the formula everyone is using is this:
Market value= .30/dollar
Banks want= .60/dollar
I think that’s the formula that people are using for mortgage-backed securities. But I don’t think that applies to derivative transactions, which goes, as far as I can tell (I’m not in the market):
Market value = 0, or unknowable
Banks want = .60/dollar
Someone should check me on that, but I believe the derivatives market has frozen, or at least these bets are worthless. And that’s where the banks are trying to get the government to bail them out.
I sure hope the Obama Administration does a better job in its foreign policy than it has so far in handling the banking crisis. Reluctantly, I am forced to ask do these guys know what they are doing and who the hell is in charge. Defeat in Afghanistan coupled with panic on Wall Street could prove a formidable challenge to the credibility of the president himself.
For the good of the republic and the welfare of us all, I sure hope Barrack Obama gets his act together. And, quickly.
So finally even sober Booman is succumbing to panic.
Look: No matter what route is taken on the banking crisis, it will take a long time before we can determine whether it was a “success” and it will depend on many factors domestically and internationally that this “plan” (or any rival plan) simply cannot control. In all likelihood, the cacophony surrounding the credit crisis and its players will not go away, not this month, not next month, not next year.
It will not go away because the cacophonists, whether they are Republicans, or big government “liberals” of the Krugman/Galbraith variety are all using the fact that a miraculous solution doesn’t exist, to underhandedly push for their respective policy agendas, which, despite their divergences, have one thing in common: they are not shared by the vast majority of people in this country. Neither a return to financial ultra-laissez-faire, nor a federally run financial system are models that have any real support in the population. Partly that is because the people, like Krugman, who push for them, don’t have the guts to actually disclose their agenda and to admit they see this as an opportunity to see the system remade according to their ideological specifications under the guise of the crisis.
Fast forward two or three years and I bet you this: the Obama administration, no matter what they do, will be viewed negatively for their handling of this crisis, since they will not have been able to produce the clamored-for miracle. But: come 2010 and 2012, if the administration delivers on health care reform, on immigration reform, and if they can demonstrate that have begun to help those many “bitter” communities Obama talked about during the primaries, they will be rewarded by the electorate.
They will, unless the other side can credibly argue that the administration used this crisis to impose a minority ideology. Looking weak and reactive and moderate on the banking mess, will ultimately be much preferable to being legitimately labeled big Government Socialists.
So Booman, I say relax and then help the push for those reforms that help “Main Street”. Let others freak out about Wall Street.
I am not panicking, I am advising.
No you are not advising. You are telling the administration to produce a miracle gun (aka a generally acclaimed clean bank rescue plan) that does not exist, cannot exist and will not exist. The credit crisis cacophony is making you freak out, you want it to go away, but it will not go away, not for a long time. Geithner’s dick is all he has today and all he will have on Monday. Since that’s how it is, I say Bully for Geithner.
Listen, compared to the current situation the S&L bail-out was a piece of cake. Today it is also universally described as a success. That however was preceded by years of bad press. The sooner you accept it, the calmer you will get: The credit crisis is a no-win situation for the Obama administration. Good solutions are not available. Life will go on anyway. The political priorities lie elsewhere.
I repeat: There. Is. No. Fucking. Gun.
Look. The Obama administration, no matter what they decide or could have decided, is going to ask everyone on Monday to eat a shit sandwich. If you liked how the Republicans ran things and want to see them run things again shortly, you can turn down that shit sandwich. Or you can eat it, recognizing that the only other things on the menu are also shit sandwiches.
From that stand point, there is no gun.
But I am not arguing that the Obama administration needs to or can serve a steak sandwich. I’m also not saying their solution is the best and must be supported. I’m saying that they ought to do a better job of explaining why we need to eat this shit.
I’m amazed that this post acknowledges numerous economists that hate Geithner’s plan, but somehow the conclusion drawn from that is that there needs to be better marketing on this plan.
Has it not occurred to Booman that Geithner’s plan is just a shitty plan, and no amount of message management is going to change that?
Maybe it isn’t a marketing problem. But I’d like to see better marketing anyway. Make your argument at least, but don’t leave meat out in the open for wolves for 48 hours without making your case.
I agree that perhaps the marketing isn’t being handled right, but my point is I don’t think fantastic marketing would make much of a difference anyway. So I’d rather see the Obama Admin “wake up” and perhaps consider fundamentally altering their plan, rather than “wake up” and do a better job of selling their current shitty plan.
A beautifully marketed but shitty idea will still end badly for us. See: Iraq, Invasion and Occupation of.
I’d like to see more detail and their answer to the standard criticisms before I go racing to condemn their strategy. You should also consider that any plan can succeed or fail through the degree of political support it has from various parties (Congress, the people, the opinion makers, and the investor class and corporate community). It’s possible for a good plan to fail for the simple reason no one will allow it to be implemented.
There are a lot axes getting grinded today. I don’t have an axe to grind.
“You should also consider that any plan can succeed or fail through the degree of political support it has from various parties (Congress, the people, the opinion makers, and the investor class and corporate community).”
I disagree, or at least disagree with the degree to which a plan succeeds because it’s popular. There are some laws to markets and economics that must be obeyed sooner or later, no matter how much we wish to avoid them.
If a derivative portfolio is near worthless, then no amount of wishing and hoping is going to change that. Similarly, all of us wanted housing prices to keep going up. All of us really, really, really wanted that to succeed. And yet…
A plan doesn’t succeed because it’s popular. That’s not what I said.
A plan cannot succeed if it isn’t given a chance to succeed.
It’s true that a plan has no guarantee of success just because it is green-lighted, but it can fail because it is not, or because it is stripped down or warped away from its original conception to meet political demands.
Perhaps they are not defending it because they can’t.
I would assume a defense of this plan would be for Geithner to produce evidence that the assets are now under-valued or have at least reached bottom, but is there any evidence like that out there? Is any independent and respectable economist defending this plan?
well, even if it is indefensible, they are most certainly going to try on Monday. So, why not get started early.
“Even if the plan is indefensible, they should still try and defend it ASAP.”
This is bizarre. If it’s a bad plan, why not use your time and energy to make it better? Why waste your political/marketing muscle on ramming a bad plan through?
I think we’re all missing something critical here. It could be that the responses we’ve heard so far are of no importance to Obama et al., and that they’re pretty sure the “important” people will be pleased (a variation of option (b) below, I suppose). Or perhaps someone’s gunning for Geitner, who’s obviously in an incredibly weak position politically. Who knows. But, if you assume that everything the administration is doing is motivated by a single, obvious, straightforward logic, you’re left with only a few conclusions:
(a) these folks are completely incompetent, flailing about, both regarding their politics and their economics,
(b) they’re completely owned by fat-cat financiers, and they’re trying to hide from us the fact that Matt Taibbi is right that the government is being taken over by Wall Street, or
(c) (a modified version of (a)) they’re making major compromises between what they know needs to be done and what they believe the political situation will allow, and even they don’t really believe in what they’re doing.
Of course, neither (a) nor (c) preclude some component of (b), but I really don’t think we know enough to explain this leak. The response has been completely predictable and Obama’s not an idiot, so we’re missing something.
” As far as I can tell, there was a leak to the New York Times but no outreach to the blogosphere (or Krugman) to tell their side of the story. “
Two things I can think of offhand:
The problem here is that we continue to view Obama as a “change agent.” He is not a “change agent.” In fact, change has come. There’s nothing he can do to stop it. His role, should he choose to accept it, is to manage the change that is inevitable. Right now, it appears he is trying to save a corrupted, bankrupt and unsustainable system. He’d best reevaluate or he’ll go down with the rest of the flotsam and jetsam of financial capitalism.
Thank you for acknowledging that the Obama administration needs to wake up. That was what I said yesterday. That is what many progressives have been saying for weeks.
Metaphorically speaking, Obama needs to stop sucking Wall Street dick. That means, dumping Geithner and Summers. Until this happens, his credibility will continue to deteriorate as a puppet of Wall Street. This plan is anti progressive, and he needs to be called on it.
No one wants Obama to succeed more than me. You can wish for our President to succeed without being a pompom girl in phoenix.
I am responding to this as #33 in the list of comments on this piece so I don’t know how many people will get this important political message!!
The NORMAL politics of the Executive branch uses a group of supporting Senators to float the Executives’ proposal to the public in the form of a trial balloon suggestion. The Administration can then evaluate the response and then proceed accordingly.
You say, “Tell me something new”.
Ok, here it is. The Obama administration has no such group of supporting Senators who are willing to fly a trial balloon for Obama! It’s a fact. The House of Representatives does not have this problem even though there is a sizeable group of Blue Dogs among the Democratic majority. But the Senate is a much different story. People in the Executive assumed that since Barack was a Democratic Senator that he would automatically have a strong group of supporters available in that body when he became President. WRONG!
So lacking such a coalition, the Obama administration has been forced to release its own trial balloon in the form of “leaks” to various people in the media. This is definitely the WRONG way to send up a trial balloon. It is important to let the trial information flow first to the most influential people whose endorsement will be necessary for eventually going public with the proposal. The trial balloon is presented to the most important first and then the disclosures flow to lesser important people and then finally it reaches the media. By the time it gets to the media the White House has received a wealth of feedback from the political universe, and as mentioned above will react accordingly.
Obama has a growing problem in the Senate due to a severe communication deficiency between the Democratic President and the Democratic Senate. If Obama wants to get ANYTHING DONE he must fix this problem.
Obama is aware of his Senate problem and since he is the popular President, he is returning to his popular roots to drum up support for his agenda in Washington. The White House is even mining the huge subscriber list that Barack created during his run for the Presidency. Unfortunately, I don’t believe that this tactic will be an effective method of resolving his problem with the Senate.
None of the current Cabinet members or any other people on the White House staff have any real influence inn the Senate. Yes I know that the purpose in picking Joe Biden as VP was to provide that strong contact and influence in the Senate. But from the current problem the White House is having with the Senate it appears that Biden is completely out of his league in terms of the role that was forecast for him in dealing with the Senate.
IMHO, Obama needs to terminate his current road show and set up his own PERSONAL caucus with the Democratic Senators to make sure he has all of his troops under the SAME BANNER if he is to have any hope of the Senate passing his current budget.
So why does he have this problem? Are they jealous because a lot of them think they should be in his spot?