Will the Public Support Nationalization? (I'm Really Asking!)

So Chrysler needs a bailout and Obama has issued an ultimatum to them, along with GM, basically requiring they get their acts together if they wish to be eligible for government aid. But Andrew Leonard asks the question:

The real question is how can Obama say this:

Year after year, decade after decade, we have seen problems papered over and tough choices kicked down the road, even as foreign competitors outpaced us. Well, we have reached the end of that road. And we, as a nation, cannot afford to shirk responsibility any longer. Now is the time to confront our problems head-on and do what's necessary to solve them....

And this:

It will require creditors to recognize that they cannot hold out for the prospect of endless government bailouts.

And not understand that Congress and the American public are sure to ask why Citigroup and Bank of America are not being held to the same standard. Treasury Secretary Tim Geithner's plan to create a market price for toxic assets has been widely lambasted as a scheme to paper over banking sector insolvency. If Obama can force Wagoner to resign, based on his record, then why haven't Citigroup's Vikram Pandit and Bank of America's Ken Lewis been forced to step down? If the White House can declare that GM's bondholders must accept they will not be repaid in full what they are owed, then why aren't Citigroup and Bank of America's debtholders being told the same thing?

Leonard goes on to propose two reasons: one being that Wall Street really runs everything and Obama is doing some pandering. The other is that the Geithner Plan (see previous posts here, here and here) is really just an intermediate step towards nationalization, which is the true goal of the Obama administration. In fact, Leonard argues for the latter, somewhat loftily stating:

Which of these scenarios is more likely to be true? Recent history is on the side of those who believe that Wall Street pulls the strings. Only the course of events over the next few months will tell us whether the alternative explanation holds water. But as I watched Obama speak, I could not shake the feeling that this was a trial run, rather than a sell-out, as preparation for the application of further strong medicine, rather than avoidance of the real problem. He's too smart, and his advisers are too smart, to think that he could go before the American public and criticize the "principle of endless bailouts" without knowing that he would be held to account for those words.

And let's remember that notwithstanding the huge size of GM is and its centrality to the economy of the United States, the logistical complexities and downstream impact of a GM bankruptcy restructuring likely pale against those involved with a Citigroup or a Bank of America. Telling the nation that GM will not survive in its present form has investors selling shares and workers in Michigan and Ohio angry. Telling the world that Citigroup is toast would drop an even bigger bomb.

I would love to believe this, and in fact still have not lost my faith in Obama. However, I hesitate to assert that behind everything that's going on in public, Obama secretly has a master plan free of all hypocricy and error, and that it will all come together in a glorifying moment when the American public realizes that everything was part of the plan. That's like saying we had planned to let the aliens take out New York, Los Angeles and Washington in the film, Indpendence Day, just so we could ultimately unite and beat them. It's entirely possible that Obama makes mistakes...though it's not to say that he did.

The other question, which Ezra Klein asks, is whether nationalization will even be politically possible given the failure of the Geithner plan. Will the American public be willing to support it as a measure of last resort, having exhausted all other feasible solutions? Or will they be so disillusioned by previous attempts at restoring bank assets that they will protest at the prosect of involving more taxpayer funds?

I am not embarassed to say that I simply don't know. I sure hope it's the former, and that there's a grand plan, and that we'll all unite and kill the alien mothership on the moon...

The Geithner Plan and Congressional Approval

Via the Economist's Free Exchange blog, we have Steve Waldman, who is upset about the Geithner plan's ability to circumvent congressional approval. Here is Mr. Waldman:

In my view, the Geithner's PPIP includes two mechanisms intended to ensure that "private investors" offer substantially inflated bids for "legacy" assets, and the net cost of the plan will be comparable to that of TARP. I might be wrong about that, but I might be right. Much of the risk will be due to loan guarantees offered by the FDIC. Is there any legal basis for using the FDIC this way? Aren't the laws describing how the FDIC is and is not supposed to behave?

And isn't Congress supposed to have the power of the purse? A loan guarantee is a contingent liability, a cost in real terms. Can the US Treasury spend money without Congressional approval, as long as it promises to spend only if a coin flip comes up heads? That's exactly what the Geithner plan (along with the scandalous but already active "Temporary Liquidity Guarantee Program" program) does. Is that even Constitutional?...

It seems to me that committing hundreds of billions of taxpayer dollars should still be considered a serious business. It seems to me that if Congress wouldn't approve the Geithner plan, in a democracy, that ought to have some meaning, and not just get written off as populist outrage and then extralegally ignored.

So I'll ask again, who passed the Geithner plan? What deliberative assembly gave the plan a pass? What's that you say? The stock market went up by nearly 500 points when it was announced on Monday? Oh. I guess the buys have it, then.

First of all, I'm curious as to why Waldman chose to put "private investors" in quotes in the first sentence. Is the implication here that they are not really private investors, which would be a ridiculous claim, or that the $35 billion that the private sector is kicking in for the bailout plan isn't enough, which would be equally ridiculous. I assume the latter is what Waldman is implying here, to which my reply is that I think any larger of a ratio would act as a disincentive for investors to buy up these assets at all, which would ruin the plan before it even started.

On to the main point about Congressional approval. Many folks have been throwing around the term "giveaway," which is understandeable, but there is a considerable difference between offering subsidies directly and offering them in the form of no-recourse loans, which is what's going on here. It is true that this could backfire if most of these assets turn out to be bad, in which case the loans would be forgiven and the government would lose lots of money. On the other hand, if these assets turn out to be good and rise in value, the investors profit, the government gets paid back with interest. This would be good.

Of course, Waldman's concern stems from the uncertainty. There has been considerable outcry from the left and right regarding the effectiveness of the Geithner bailout plan and it seems that the consensus (at least among mainstream pundistry) is that the plan will fail. See Paul Krugman, whose opposition is loud, proud and almost irritating (if not for the fact that the man has attained almost 'do-no-wrong status' in my eyes). So then why commit all of this money to a plan that may or may not work, at best? The reason is because we have to. First, let's recap why the plan is necessary (Congressional approval or not0. I have stated earlier that I think the Geithner plan is a necessary step, politically, in that considering the alternatives (nationalization or the original Paulson plan), it is the easiest to kick-start without causing massive social (and market) upheaval. See Mark Thoma and Brad Delong for more on this. In fact, let's throw in a quote from Thoma, just to drive the point home:

So I do not take a binary (or, I suppose, trinary), either/or approach to the proposals where I think one plan will work and the others will fail miserably. All three plans have their pluses and minuses. The politics of the Paulson plan make it a non-starter, I have no quarrel with the view that it constitutes a giveaway that is not justified, so the only way the Paulson plan will work is if we can convince people that equity stakes or some other mechanism makes the plan sufficiently equitable. I prefer nationalization because it provides a certainty in terms of what will happen that the other plans do not provide, the Geithner plan in particular, but it also appears to suffer from the political handicap of appearing (to some) to be "socialist," and there are arguments that the Geithner plan provides better economic incentives than nationalization (though not everyone agrees with this assertion).

More to the point now, what about Congressional approval? Mustn't the appropriation of all these funds for an iffy plan require a democratic approval process? Well, this is a tricky issue. One that Matt Yglesias actually wrote about several days ago, complaining that the no one addressed the topic. Here's Matt:

One aspect of the Geithner plan that I think people aren’t focusing enough attention on is that unlike the other main alternative approaches, it can be executed without further congressional approval. The reason is that there are federal agencies with a standing authority to make loans. And though the plan does have a potentially giveaway structure, technically what’s being offered aren’t subsidies but no recourse loans. Or to put it another way, the subsidies are in the form of no recourse loans rather than direct appropriations, so the government has the authority to move forward under existing TARP legislation and other laws. That, I think, clearly explains the somewhat byzantine structure of the plan’s operations and is also, if you’re sitting in the West Wing, a considerable advantage over a nationalization plan that would require large additional appropriations to cover the debts of nationalized institutions.

There is the legal side. Of course, as Yglesias notes later, this can be considered much too technical, and almost a cheap way of getting around legislation. However, I would like to argue that given the current economic and political climate, it is necessary to pass this as quickly as possible. As Krugman notes, "Every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost." Is this enough of a reason to warrant such actions by the Obama administration? One can at least argue the case.

Furthermore, and let me just say that the following is not an argument to side-step Congressional approval, but consider the historical use of "presidential prerogative," a term that should be prevalent by now; in the midst of impending crisis, the executive takes measures that often bypass boundaries set forth by the Constitution. Lincoln did it, Roosevelt did it, Bush did it (though the latter isn't the greatest example). Again, it is of course arguable whether such prerogatives are both a) applicable now, and b) whether they are merited at all, ever. Something to think about, though.

Understanding the Banking Crisis and Geithner Plan

For those of you who need some clarification on what's going on in the economy right now, both Brad Delong and Mark Thoma have written some wonderful pieces illuminating the mechanics for the layperson. Delong's is in the form of an FAQ. Thoma compares the situation to purchasing a car under uncertainty. Highly recommended.

Thoughts on the Geithner Plan

Paul Krugman is the most noted opponent of Timothy Geithner's "pubic-private partnership" plan to fix the problem of toxic assets. In fact, today he says:

It’s a bit disappointing to see the Obama administration engaging in this sort of market-worship — hailing markets as a Good Thing in themselves, rather than as an often but not always useful means to an end. But I have reason to think that unlike the Bushies, they don’t really believe it; it’s just politics. Which is actually better than having genuine market fanatics running things, I guess.

This recalls a question that our own SevenDollarPen had asked in an earlier post:

Maybe someone can explain this to me. Why does it make any sense for taxpayers to give billions (or more) to these banks and not own the banks? Why are profits privatized and losses nationalized?

Paul Krugman thinks it's all politics. Interestingly enough, despite the fact that I think this is true, I am not entirely opposed to it (though admittedly my knowledge of the situation is somewhat limited). This is a delicate situation that I feel requires a bit of politics. Geithner himself is in a very tight spot. Regardless of the action he takes, he is bound to face criticism from the left and the right. Consider the ramifications of announcing his current plan. People on the left, such as Krugman, fault Geithner--and the Obama administration--for pandering to Wall Street and not being bold enough to advocate a policy of nationalization and public ownership. And although Wall Street jumped with joy at the news, people on the right will still continue to accuse Geithner of supporting big-government. However, would the alternative have been a better direction to go? As Andrew Leonard writes:

On the other hand, just suppose Geithner had followed the Krugman plan, and announced the immediate nationalization of Citigroup and Bank of America on Monday morning. It's hardly a stretch to imagine an ensuing market crash as bad or even worse than what we have already witnessed. And market crashes don't just hurt the pocketbooks of the rich. They wipe out pensions and have an undeniable effect on consumer psychology.

If the stock market goes down, right-wing critics declare that Geithner (and by extension, the Obama presidency) is a failure because "the market" has lost confidence in the administration. But if the stock market goes up, the left wing suspects that's only due to the unfair funneling of taxpayer money to Wall Street. If one constituency is satisfied, the other is bound to be distraught.

Leonard actually goes on to argue that in this climate, it's silly to imagine a middle path that could please everybody. However, I don't think we should be so skeptical of the plan just yet. True, nationalization seems to be the most promising route, supported now by many economists besides Paul Krugman, including Doug Holtz-Eakin, who was McCain's economic advisor during his campaign. Yet, consider Mark Thoma's comments on the matter in a wonderfully informative post entitled "Which Bailout Plan is Best" (Thoma, by the way, is a supporter of nationalization):

I prefer nationalization because it provides a certainty in terms of what will happen that the other plans do not provide, the Geithner plan in particular, but it also appears to suffer from the political handicap of appearing (to some) to be "socialist," and there are arguments that the Geithner plan provides better economic incentives than nationalization (though not everyone agrees with this assertion). The Geithner plan also has its political problems, problems that will get much worse if the loans that are part of the proposal turn out to be bad as some, but not all, fear. So all three plans do the requisite things - get assets off the books and provide recapitalization - and each comes with its own set of political worries.

So I am not wedded to a particular plan, I think they all have good and bad points, and that (with the proper tweaks) each could work. Sure, some seem better than others, but none - to me - is so off the mark that I am filled with despair because we are following a particular course of action.

What do you--the readers--think about the plan? Comments are welcome! By the way, for a very clear analogy of the tenets of the Geithner plan as compared with other bailout proposals (i.e. nationalization and the old Paulson plan), read this post by Mark Thoma, which relates the current situation to cars in a lot.

Why do we care about shareholders?

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” Treasury Secretary Tim Geithner said.

Why? Maybe someone can explain this to me. Why does it make any sense for taxpayers to give billions (or more) to these banks and not own the banks? Why are profits privatized and losses nationalized? I'm not saying anything new. Krugman has repeated this refrain ad nauseum. But I'm not asking rhetorical questions. I genuinely don't get it. The government bought preferred stock so as not to dilute existing shareholders' stake. But why the hell are we jumping through hoops to protect these shareholders? Why?

If I invest in a company by buying stock, and that company goes broke, I lose my money. Nobody protects me. But if a bank goes broke — the precious shareholders! We can't let anything happen to them! Please, give our money to the same people who just blew up our economy and give us nothing in return. We don't need any control over these banks beyond the tisk-tisking power of politicians. Just don't hurt the shareholders!

These banks are broke. They would be distant memories were it not for government life support. So why aren't the shareholders who invested in these now-bankrupt banks already wiped out? If not for the bailout, there would be no banks to hold shares of. Someone please explain it to me. Seriously.