Obama's Bailout

So given all the objections to the stimulus, was Obama wrong to seek broad bipartisan support? That depends on how you interpret the endgame. To get the 60 Senate votes needed to override a filibuster, Obama had to make concessions to a few Republican "moderates" — and those concessions made a somewhat weak plan significantly weaker, stripping out spending, especially aid to states, and replacing it with tax cuts. Obama aides, notably Rahm Emanuel, claim that this showed that the Obama plan was the strongest possible. But I'd argue that the moderates would have demanded a pound of flesh from whatever Obama proposed, and that he guaranteed a too–weak bill by aiming low.

Whatever your interpretation of what happened, however, the result was a stimulus bill that is much better than nothing but one that will at best mitigate the slump, not cure it.

THE BANK BAILOUT

So far, obama has taken sensible action on homeowner relief, and sensible but probably inadequate action on fiscal stimulus. What about the third type of action, rescuing financial institutions? At the time of writing, the Obama administration had announced what it said was a plan — but nobody knew what it meant. And thereby hangs a tale. Banks, broadly defined — which include many institutions that don't have big marble buildings and rows of tellers but nonetheless fulfill banking functions — play a crucial role in the economy. Yet major U.S. banks have suffered heavy losses in this crisis, leaving them severely undercapitalized if not insolvent. What that means, in English, is that big banks don't have enough assets to be sure of paying their debts — which in turn means that nobody wants to deal with them, for fear that they won't be repaid. As a result, our financial system is half–crippled.

To help the economy, the government needs to get the banks back on their feet. But how should that be done? Some proposals call for having the government buy troubled assets, like mortgage–backed securities, from the banks — but this only helps the banks if the government pays much higher prices for these assets than private investors are willing to offer, which means that taxpayers get a raw deal and the banks get a huge windfall. Or the government could guarantee the banks against large losses — but this, again, is a raw deal for taxpayers and a gift to the banks. And we're talking about a lot of money here: Some estimates put the losses of U.S. banks in this crisis at more than $1.5 trillion.

There is one more option, however. The government could put money into the banks in return for a commensurate share of ownership. What that would mean in practice, for at least some of the biggest banks, would be nationalization. Think of it this way: Citigroup and Bank of America probably need hundreds of billions of dollars in additional capital, yet as of February 26th, their combined stock–market value was less than $40 billion — and even that figure was inflated by the lingering hope of receiving a government handout. There's really no way for the government to inject the capital these banks need without either providing that handout, on a grand scale, or taking ownership itself.

A number of people have followed this line of thought to its natural conclusion — including some people whose names might surprise you. Maybe it's no big deal that Sen. Chris Dodd of Connecticut has said that temporary nationalization may be necessary, but so has Sen. Charles Schumer of New York, usually a defender of the investment industry — and so has none other than Alan Greenspan.

At the time of this writing, however, the Obama administration still wasn't willing to go there. On February 10th, Tim Geithner, the Treasury secretary, purportedly laid out the administration's bank plan — but nobody understood what, exactly, he was proposing, probably because the administration itself hadn't decided what to do. Even Obama has been cagey about the matter, praising the "Swedish model" (Sweden nationalized some major banks in the early 1990s) but suggesting that the United States is different.

Why the hesitation? The bankers themselves, not surprisingly, insist that a government takeover would be a terrible idea. And then there are the cries of "socialism" coming from the usual suspects, along with assertions that governments do a very bad job of running banks. Actually, as many of us have pointed out, the lesson of the past few years is that bankers do a very bad job of running banks — it was the private sector, not the government, that lost all that money. And in an important sense, the banks are already socialized: They're getting lots of government money, and the government has made it clear that they won't be allowed to fail. In effect, the government already owns their possible losses; why shouldn't it own their possible gains?

But anyway, talk of socialism deliberately misses the point. Nobody involved in the rescue plan wants the government running banks on a permanent basis. The idea, instead, is to do what is routinely done with smaller banks when they go bust and are seized by the FDIC: The government takes them into temporary receivership and cleans up their balance sheets — taking over their bad assets and paying off enough of their debts so that what's left is a viable enterprise. Then the bank is re– privatized, and the government gets the best price it can for the troubled assets. That's what Sweden did in the early 1990s, in what is widely regarded as a success story. It's also what we ourselves did with failed savings–and–loan institutions at the end of the 1980s; the Resolution Trust Corporation, which took over the troubled assets, is almost always cited as a good example of how to resolve a banking crisis while getting the best possible deal for the taxpayers.

Maybe it's a problem with words: Some have suggested, in fact, that we stop talking about "nationalization" and call the process "pre–privatization." Yet, whatever you call it, the Obama administration is still hesitating. Why?

It may be the same kind of political caution that led to a too–weak stimulus, although it's hard to see why that caution persists now that so many mainstream figures have accepted the possible need for nationalization. (Who would have expected to find Alan Greenspan taking a position to Obama's left?)