My Two Cents

The Geithner Plan could work

Chris Farrell Apr 2, 2009

The economic logic of nationalization to solve the banking crisis is compelling, but I’m increasingly convinced that the Geithner plan has a good chance of succeeding on its merits. It does appear that he managed take the deeply flawed Paulson Plan and turn it into a workable solution. inelegant, but workable.

This post by The Incidental Economist adds an important element: He notes how critical economist Paul Krugman has been of the Administration’s solution. And, even though Krugman has been spot on for years, I think he’s being too critical of Geithner and the President this time around: TIE makes a good case that the politics of the Geithner plan are better than the politics of nationalization.

As the liberal economist of record, Krugman’s critique of PPIP received a lot of press much of it uncritical. I think a little more critical reading is warranted, that his cry for nationalization now misses something crucial. Namely, he has a blind spot for the political and implementation risks and challenges. As John Heilemann wrote in New York Magazine, “Getting the economics right may be devilishly difficult–but the politics are even trickier, and just as crucial.”

One cannot be president and apolitical. Incentives and risks of governance compel Obama to think beyond economics even when considering economic issues. He is, no doubt, sensitive to his political capital, the issues over which to allocate it, and Congress’ appetite for alternatives to PPIP (like nationalization), among others. Brad DeLong points out that Obama does not easily achieve the 60 votes in the Senate he would need to take bolder action. (PPIP requires no additional congressional approval.) “Do we want to revive our economy, or do we want to punish the bankers?” DeLong asks, “I don’t agree that we can do both.” Matthew Yglesias elaborates,

“Doing something…without an additional vote makes it more likely that they can ask Congress to cast those tough votes on the budget and on health care rather than on bank bailouts.”

According to Obama aides, “Krugman’s suggestion that the government could take over the banking system is deeply impractical.” (Newsweek) Impractical politically but also because nationalization would require expertise and staff the Treasury Department does not yet possess. Therefore, like it or not, Geithner needs the banking industry’s cooperation to increase lending. He nearly lost it during the uproar over the AIG bonuses. He’d lose it for sure with a nationalization plan.

President Obama is acting more like FDR than Keynes.

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