I’m a little gobsmacked by the latest Chris Bowers piece on the economic recovery efforts. He acknowledges that Obama today directly addressed and denied some of the conspiracy theories that have been peddled at OpenLeft, but then he goes on to say this:
However, President Obama assures the country that the decision to avoid temporary nationalization had nothing to do with either ideological opposition or with coddling Wall Street…
…If [lack of] nationalization isn’t about concern for the shareholders who caused this mess, then why is undermining confidence listed as one of the two main reasons to avoid nationalization? Apart from shareholders, it is extremely difficult for me to imagine whose confidence President Obama is referring to in this sentence.
Bowers is referring to this quote from Obama that explains the two main reasons why he didn’t move to temporarily nationalize the megabanks.
On the other hand, there have been some who don’t dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear – the reason we have not taken this step has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.
Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence.
Bowers is hung up on a non-contradiction. Obama doesn’t care about protecting shareholders of Bank of America from being wiped out. But he is concerned about people’s general level of confidence in economic and financial institutions, and the market as a whole. People need confidence to invest, borrow, or lend. There is nothing inconsistent with being indifferent to shareholders’ interests in megabanks and being concerned about confidence in the investor class as a general matter.
Then Bowers makes a seemingly offhand comment that undermines just about everything he’s written on this topic.
In the end, temporary nationalization was likely avoided by the Obama administration because there wasn’t enough money available to pull it off, and the current political climate makes it impossible to get more.
If Bowers believes this, then a) why has he been so critical, and b) why has he fanned the flames to make the political climate even more hostile?
What have I said all along? I’ve said that there is no evidence that nationalization won’t be more expensive in the long run and that there is plenty of evidence that it will be staggeringly costly with no hope of recouping the losses. I’ve said that Obama is not doing this as some kind of dupe of Larry Summers but out of a cool assessment of the risks, benefits, and political constraints he faces. I’ve said that we have to restore the credit markets and market confidence, and that nationalization would be risky. I’m not shocked at all to hear Obama make essentially the same arguments.
I am a little surprised to see Bowers seemingly bemoaning the idea of boosting shareholder confidence. Everyone with a 401(k) or IRA in this country is a shareholder, and we all benefit when the stock market goes up. We may want huge shareholders in megabanks to get wiped out, but we don’t want our retirement plans wiped out right along with them. That’s why we need market confidence. That’s why it was always reckless to insist that Obama pursue a plan of punishing shareholders regardless of overall costs and without deference to political constraints. And peddling the idea that Obama was avoiding nationalization in some kind of scam to steal our money and give it to banksters was just kind of stupid.
boo, your link to “chris bowers” piece is screwed up…takes you to the bbc report on the old ex-nazi from an earlier post.
not that bowers is hard to find…but…
for those who don’t know where bowers hangs out, the essay in question is here
thanks. Should be fixed now.
As noted by Booman, why all the bitching if this is true?
What caught my ear was this section noted my Matt Y, who says:
“What’s disappointing about this section of the speech is the incredibly vagueness about what will happen if stress tests prove that banks need additional government capital:”
http://yglesias.thinkprogress.org/archives/2009/04/obama_argues_that_avoiding_nationalization_is_a_w
ay_to_save_taxpayers_money.php
This sounds to me similar to what Sweden did to their undercapitalized bank: gave them time to raise private capital, and when that failed, they tossed out the management and took it over.
So on one hand, Obama is saying nationalization would have cost too much, but admits that in the end that’s what might be needed for some banks. There’s no other way for me to read it. What am I missing?
you are missing nothing.
Booman, it’s not fair to attack Chris Bowers. He just isn’t that bright. He’s doing the best he can with what he has. Does he have any followers? Why do you feel the need to debunk him? It’s like shooting fish in a fishbowl. Seriously.
Talk about things that matter. Don’t waste time on Bowers.
He’s part of a group effort that goes from OpenLeft to FDL and that peripherally include Krugman and even, although I hate to say it, Duncan, and then extends all the way down to Puma-type morons like the CorrenteWire crew. It’s not at all clear they don’t do more good than harm, by making Obama so clearly represent reason and allowing him to tell the banks that his own supporters (some of them sort of were) want the banks nationalized at once.
Well as Nassim Taleb observed this week only scams and ponzi schemes require “confidence” to work. Why do you think they call it a “confidence game”?
This is … overly simplistic, I think.
I doubt that 401Ks are driving major policy – in fact if they were I’d be more than a wee bit upset. Because propping up a failing system just because everyone’s pensions are committed to it is kind of stupid – better to let the system fail in an orderly way and replace it with something else. If our privately held pension system isn’t working because of market turbulence, we need to setup a better pension system.
I suspect that the problem is more along the lines of “If investors are spooked, they won’t invest money.” Not money invested in the “market as a casino”, but real investments in companies looking to grow or expand through sale of stock. If it looks like the first move that the US makes when a massive company is about to go under is to nationalize it and make the shareholders take a haircut, that’s going to spook people. And not necessarily in the rational way that you want them spooked (i.e. be more careful about who you have as a CEO, what they’re doing, and how much the company is spending on compensation) but in a bad way that makes them shove the money under the metaphorical mattress instead of putting it into companies. Where it can create new jobs to help with the flagging employment situation here in the US.
I suspect THAT’S what the majority of the “flailing” around is about – a desire to let the market operate as long as it can so that investors know that the US government trusts the system and isn’t going to be making knee-jerk reactions. There is an argument to be made about whether the long term costs to the taxpayers outweigh the long term benefits of keeping the investment money moving around, but I can actually see the point of not reacting to quickly or too extremely and spooking the cattle here.
Booman,
Just want to thank you for taking the time to read and respond to the Openlefters, thereby saving me the aggravation (which was considerable).
During the campaign, I read Open Left religiously, mostly because it was a good clearinghouse for info. But since the election, it got more and more difficult to stomach. It’s now at the point when I only look to out of a morbid curiosity.
Still, it is a pretty popular site, and so I think it is worth the time to react occasionally. I’m just glad I don’t have to do it.
As for confidence, whose are we talking about here? Confidence among tax payers? I think actual taxpayers might be more confident to have government control a bank if your bank was saying, in the straights of Citi.
I don’t know about Bowers (though I suspect this is a part of it) but in my responses to your posts I figured out why I would much rather have nationalization: Even if it costs more in dollar terms, I find the value of breaking up the big banks and diluting their power in regards to the political system is worth the monetary loss now to make things much better later. Because I believe the big financial institutions have been that detrimental to our system and I do not see how their power can be diluted except by taking advantage of the current crisis.
Perhaps that is creative destruction, but I believe the consequences of that are the slow motion disintegration of our institutions will continue, perhaps arrested by presidents like Obama but never stopped.
I think we have to regulate away too-big-to-fail institutions, and we need to do it in this year’s and next’s years Congress. Forced preemptive nationalization followed by piecemeal sales of large chunks of the megabanks is one possible way to accomplish this, but it carries a lot of risks and a guaranteed price tag beyond what Congress will accept.
We could do this in a less risky more orderly way by merely telling the big banks that they have to break off their financial services from their deposits in the next three years, for example.
We don’t have to rush this and Congress should be involved and hold hearings and think things through.
Think about if you woke up tomorrow and we’re responsible for making these decisions. Wouldn’t you be cautious?
Yes and no. On the one hand I don’t have any confidence that the Obama administration or this congress would ever tell the big banks they have to break their financial services from their deposits. To an extent I am arguing for a “should be done” not what I think is the actual unvierse of Obama’s actions.
On the other hand I am an advocate of waiting on decisions until your options narrow (using power when you must but not before).
Well, Obama has to operate in the universe of what ‘can be done’. We should always remember that. He, of course, has some control of what ‘can be done’ depending on how much political capital he is willing to spend. But he has constraints.
I think both he and Congress understand that they have some work to do in coming up with new regulation schemes. Will they get it right? When do they ever? But they’ll move us in the right direction and hopefully improve the situation. I think they do understand the too-big-to-fail problem but they also have to consider foreign competition. It’s a big set of issues and extremely complex.
Actually scratch the first paragraph here. After reading the Open Left comments (and let me note I did not read the OL story before commenting) I am more convinced about the confidence angle. Preventing bank runs by citizens (my family panics) are important, preventing bondholder runs (China panics) have the potential to be just as nasty if not more so.
But I don’t see how the current environment generates more confidence in the bondholders with the threat of bankruptcy around them instead of nationalization–or are they counting on endless tax monies?