Damned if you do

John Cassidy at The New Yorker has, I assume, been critical of Timothy Geithner in the past. But he takes a look at Geithner's work on stabalizing the fiancial system and finds he's pretty impressed with the results, one year in. In fact, about a year ago Geither outlined his proposal to take on the banks' "toxic" assets and force them to undergo "stress tests." He was roundly criticized for not going far enough or being too vague. Above all, for being too cozy with Wall Street and not nationalizing the banks, a solution which seemed obvious -- and certainly inevitable -- at the time.

But Geithner's refusal to nationalize and instead run stress tests that were apparently more rigorous then they were perceived by outsiders at the time, seems to have worked pretty well. The politics, though, have been hell.

In the ensuing weeks, the Dow dropped below 6,500, and other indicators of financial stress, such as the interest rate that banks charge one another, rose, pointing to continued skepticism about Geithner’s plan. Commentators from Paul Krugman and Joseph Stiglitz on the left to Alan Greenspan and Lindsey Graham on the right called on the authorities to seize control and restructure the most troubled banks, which were widely believed to be insolvent. “I understand that once in a hundred years this is what you do,” Greenspan told an interviewer. Adam S. Posen, a senior fellow at the Peterson Institute for International Economics, said to the Times, “Putting it off only brings more troubles and higher costs in the long run.” At a lengthy White House meeting last March, Lawrence Summers, the head of the National Economic Council, pressed Geithner and his aides on whether nationalization was now the least bad option. Geithner held his ground, arguing that rushing to take over salvageable financial institutions would be irresponsible and economically damaging. In the end, Summers and the President agreed with him. But his stilted public performances, together with his reluctance to take a populist line on other issues, such as Wall Street bonuses, led to demands for his resignation—calls that have continued into his second year in office. From across the political spectrum, critics have accused him of kowtowing to Wall Street and failing to hold to account those responsible for the financial crisis.

On the anniversary of Geithner’s disastrous speech, the Treasury issued a two-page briefing paper hailing the achievements of the stabilization plan, which much of the media ignored. “A year later, there’s still a lot to criticize,” David Wessel, the economics editor of the Wall Street Journal, wrote, noting that the unemployment rate remains close to ten per cent and that banks are paying generous bonuses to their staff but remain reluctant to lend to small businesses.

And yet—whisper it softly—there is good news about the financial system and the roundly loathed bank bailout, the seven-hundred-billion-dollar relief package that Congress approved in October, 2008. During the past ten months, U.S. banks have raised more than a hundred and forty billion dollars from investors and increased the reserves they hold to cover unforeseen losses. While many small banks are still in peril, their larger brethren, such as Bank of America, Wells Fargo, and Goldman Sachs, are more strongly capitalized than many of their international competitors, and they have repaid virtually all the money they received from taxpayers. Looking ahead, the Treasury Department estimates the ultimate cost of the financial-rescue package at just a hundred and seventeen billion dollars—and much of that related to propping up General Motors and Chrysler. Barring something unexpected, the bailout will end up costing taxpayers less than the savings-and-loan implosion of the early nineteen-nineties. The government could conceivably end up making money.

Wessel is right, of course, that the unemployment rate remains stubbornly high—the rise in long-term joblessness is particularly worrying—but other economic trends are pointing up. Although some businesses are struggling to get bank financing, municipalities, car buyers, and students again have access to credit. Consumption and exports are rising. Corporations are once more spending money on software and machinery. Meanwhile, it looks as though the Senate may be finally preparing to vote on an overhaul of financial regulation.

Economists are still debating what it was that ended the financial crisis and turned the economy around. It is inarguable, though, that Geithner’s stabilization plan has proved more effective than many observers expected, this one included. “The policy worked,” Brad Hintz, a top-rated financial analyst at the research firm Sanford C. Bernstein, said. “Now, did it raise the mob to come after the bankers and politicians and try and drag them off to the guillotine? Certainly it did. That’s part of the political price that is being paid for the policy having worked.”

A few weeks ago, during a blizzard that deposited several feet of snow on Washington, I met Geithner in his office. Dressed casually in bluejeans and snow boots, he seemed to have largely given up hope of convincing the public that the financial-rescue plan was well calibrated, but he insisted that it had been necessary. “My basic view is that we did a pretty successful job of putting out a severe financial crisis and avoiding a Great Depression or Great Deflation type of thing,” he said. “We saved the economy, but we kind of lost the public doing it.”

Cassidy cites complaints that Obama has not done enough to build public support for Geithner's programs, but I think that is giving Obama an oratorical power that would make Pericles sound like GW Bush. This stuff is complicated and not pretty. It's easy to rail against banksters and their bonuses, much tougher to explain how stress tests would reinstill trust in financial markets.

The other problem is something it would be hard for Obama or Geithner to do anything about.

Getting the economics right is a Treasury Secretary’s primary responsibility. But economic policies also have a political aspect—economics used to be called “political economy,” after all—which no elected official can afford to ignore. In a recent article that circulated widely in Democratic circles, Rolling Stone’s Matt Taibbi accused the Obama Administration of staffing its economic team with “bubble-fattened ex-bankers and laissez-faire intellectuals,” who “proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.” Simon Johnson, a former chief economist at the International Monetary Fund, has put forward a more refined variant of the same argument. In a story in The Atlantic last year, he accused senior U.S. officials, Geithner included, of adopting, consciously or subconsciously, the mental outlook of Wall Street—a problem known in the economics literature as “cognitive regulatory capture.”

Geithner seemed exasperated by these critiques, and by the idea that the Democrats were now viewed in some quarters as beholden to business interests. “I don’t think the Democratic Party is seen as the party of Wall Street,” he said. “I think there are some in the Democratic Party that think Tim and Larry are too conservative for them and that the President is too receptive to our advice.” The reality, Geithner insisted, was that the Obama Administration had given just seven billion dollars to banks—mostly small and midsize banks, not big Wall Street firms—and it had proposed the biggest regulatory overhaul in seventy-five years. “Some on the left have fallen into a trap set by the Republicans, allowing voters to mistakenly think that the biggest part of the bank bailout had come under Obama rather than Bush,” Geithner said. He suggested that his critics draw up a balance sheet comparing the Administration’s expenditures on programs that benefitted Wall Street with those that benefitted Main Street. “By any measure, the Main Street stuff dwarfs the Wall Street stuff. Compare money for housing versus money for banks. Measure tax cuts for working families versus money for banks.”

In other words, if folks want to believe Goldman Sachs makes policy in the administration or if they want to pin the bank bailouts on the Kenyan imposter, there isn't a great deal the greatest flak-master can do about it.

The article ends by noting that Geithner has been putting out financial infernos for much of his career, first at the Fed, now at Treasury. And he's succeeded because he's been willing to withstand the ugly politics of making the right -- albeit often unpopular -- policy decisions. And that reminded me of how little credit the administration got for a first year in office in which they accomplished a vast array of important stuff, and stand on the precipice of signing into law sweeping health care reform. And yet they're accused of having had a "failed" first year.

I realize a lot of folks voted for the Hopey Changey stuff, but I think most of us have gotten what we thought we were voting for. A pragmatic, thoughtful leader who would take on the tough problems that we've basically been kicking down the road for three decades through ideological hackery or political expediency.

Whatever, I guess. Just blame Rahm.