After months of delay, Treasury Secretary Tim Geithner finally unveiled the Obama administration’s plan for jump-starting a marketplace for “troubled” real estate-backed assets held by banks.
As noted in an editorial in today’s Wall Street Journal, a more direct, Resolution Trust Corporation-type facility, if initiated months ago as some had advocated, would have worked better, faster, and with more transparency for taxpayers that what Geithner is now planning. But we are where we are, and this plan is much better than no plan. It is long past time to remove the uncertainty hanging over the markets.
And, to be fair, the Geithner approach also seems to stand a reasonable chance of working, too. Some troubled assets should begin changing hands again fairly soon, thus pulling back the curtain on their true value, which should finally allow a bank “work out” to get underway in earnest. There’s no value at this point in Republicans pushing for an alternative approach. It is much better for the country to just get on with the plan that has been presented.
Still, it’s worth noting why the Geithner plan looks as it does. By all accounts, a primary motivation for its complex financial flows is the desire to avoid going back to Congress for funding and approval. Hence the use of FDIC reserves, loan guarantees, Fed money, and the last resources available from the $700 billion in TARP funding. This patchwork approach may work, but it also may leave the administration without any ability to deal with other contingencies — not a good position to be in with a crisis of this magnitude still unfolding.
Indeed, it’s a lamentable state of affairs when, in a true crisis, a Congress controlled by the same party as the president is not trusted by the administration to produce sound emergency legislation when it’s really needed. But that seems to be where we are. And the Obama team really has no one to blame but themselves for this particular box they now find themselves in. The constant drumbeat which has laid the entire blame for the turmoil on private-sector “greed” and “de-regulation” simply reinforces the worse instincts in a left-leaning Congress. What the public needs to hear from President Obama is that this crisis has complex origins, but it would not have occurred if there weren’t massive public-policy failures too, with many powerful Democrats and Republicans to blame, including himself. The flawed corporate structures of Fannie and Freddie which privatized gains and socialized losses. The excessively expansionary monetary policy earlier this decade. Long-standing tax policy which encourages ever larger mortgages. The flow of foreign reserves, driven by excessive U.S. consumption of imported goods, into U.S. credit markets. And the structural federal budget deficits that have fueled more consumption than our incomes could really support. Economists have been warning policymakers of the dangers of each of these policies for years — and far too few in positions of power ever lifted a finger to reduce the risks.
But it is almost too late now for the Obama team to change their tone and start treating the economic crisis with the intellectual seriousness it deserves. The damage has been done. Most members of Congress think they know why we are in this position, and it’s because profit-seeking firms, well, sought profits.
In this environment, the Obama team would be well advised to scuttle the idea of seeking new powers for the Treasury to seize non-bank institutions deemed too big to fail. If the Congress cannot be trusted to provide the financial resources needed in an emergency, can it be trusted to judiciously write a new law allowing the seizure of just about any private sector firm in the country? The same impulse that pushes members toward simplistic explanations for the crisis would surely lead them to support to ill-advised interventions we would regret for decades.
There needs to be a sober discussion of what kind of regulatory approach will prevent a recurrence of this disaster. But this is not the way to go about it. The Obama folks are playing with fire if they ask for sweeping seizure authority now, with this Congress and in this environment.