The Big Either/Or
John Holbon’s “Either/Or” is a sensible short analysis of the heart of the financial crisis and presents the case for giving the Geithner plan time to work,(or fail) excerpted from Crooked Timber:
Suppose Obama came out and said, roughly:
My fellow Americans, the thing about the Geithner plan is this. Experts disagree about the nature of the crisis. Either it is a liquidity problem or an insolvency problem. That means: either the market values of these so-called toxic assets are depressed because of a kind of market failure; or the market has priced these assets more or less correctly and many institutions holding these assets are, as a result, insolvent. If we are indeed in a liquidity crisis, the Geithner plan should solve it as well as any alternative plan could. If it is an insolvency crisis, however, as many experts believe, the Geithner plan will do nothing – or not nearly enough.
If the Geithner plan fails, we will confront another either/or: either nationalize these too-big-to-fail institutions, at great cost, or allow them to fail, collapsing the global financial system and, very likely, the world economy. This is no true choice, however. Hard as nationalization will be, if it comes to that, the alternative would be far, far worse.
We do not need to take this daunting step of nationalization yet because, first, we’re trying the Geithner plan. What you should know about the Geithner plan is that, if it fails, it will still have been worth trying. We will have determined that the problem is indeed insolvency. We will have clarified the path to be taken, laid to rest any reasonable skepticism about the strict need for nationalization. And we will have paid no more for this knowledge than we would have had to pay in any case. If the government effectively transfers money to distressed financial institutions, under the Geithner plan, and later those institutions have to be nationalized for a time, there is no need to ‘pay twice’.
[Read the rest at crookedtimber.org]
This is the first piece of analysis that has actually put me at ease in a long time. In summary, experts disagree about the nature of the problem, Geithner’s plan may “work” or may fail. If it does fail, the case for nationalizing the US banks is clear; the money spent bailing them out will be effectively back in the hands of government until they can get the financial system back on a solid foundation and re-privatize. To be clear, I still share Krugman’s concerns about the potential of a luke warm, quasi-success / semi-failure of the plan where the global economy sputters along flatlining and not growing (I also share Krugman’s concerns about the moral hazard inherent in the government handing over huge subsidies to investors). If this third outcome results, the biggest fight of Obama’s first term will likely be the political battle about the necessity of temporary nationalization of the banks.
Let’s hope it works the first time. Because if the Geithner plan does fail (or even semi-fail), Obama will have lost lots of one of his most precious resources in the midst of this crisis: time.
