Thoughts on Geithner


A lot of bloggers have been talking about the Washington Post article on Geithner which offers an explanation of his bizarre non-plan plan:

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday. Lawmakers, investors and analysts expressed dismay over the lack of specifics. Markets tanked, and fresh doubts arose about the hand now steering the country's financial policy.

Public acceptance of the plan suffered from several missteps, said sources involved in the decision-making or in close contact with those who were.

The Obama administration, they said, failed to rein in the grand expectations built for the plan on Wall Street and in Washington, concluding that they would rather disappoint the markets with vagueness than lay out a lot of details they might have to change later -- a failing they saw in the Bush administration's handling of the crisis. 

The longer I think about it, the more shocked I am at how badly Treasury has handled this.  First, they refused to consult with banks or, apparently, too many Bush administration officials, because they didn't want the plan "tainted" by such seedy associations.  Since as far as I can tell these two sources have custody of, to a first approximation, 90% of the information needed to make a plan work, this was moronic.  It was a classic technocratic error, thinking that a pure planner should operate without regard to the desires of the grubby, greedy people they're supposed to regulate.

Treasury didn't just fail to deliver a plan; it actively made things worse.  At this point, the uncertainty in the markets about the uncertainty of various financial institutions is making it more likely that those institutions will have problem--no one wants to invest in a bank that might be nationalized, and no one wants to deposit substantial funds in a bank that might not.  A plan would at least have shown some committment in a specific direction, even if its details had to be changed at a later date.  Right now, Geithner has implicitly left all options on the table.

I recognize that the Obama administration is in a really difficult spot:  the two main alternatives, giving banks a ton of money to recapitalize, or nationalizing them, are both politically unpopular and possibly technically infeasible.  But they haven't even done obvious things, like making it a priority to get Geithner's undersecretaries and deputies appointed.  Moreover, they've known that this was coming for months.  That's enough time to come up with something better than a vague desire to get private investors to kick some money into the pot.  I supported Geithner's appointment enthusiastically.  But he has sorely failed at his first major project.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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