I've been meaning to welcome Ryan Avent to his new gig at Portfolio.com (where he has replaced Felix Salmon). His musings over the past couple of days about why the Obama Administration is handling the banking crisis in such a tentative, unimpressive way provide a good opportunity. Here's one:
There is a popular idea that if only a charismatic figure had occupied the spot at Treasury, like Paul Volcker, then his confidence would have carried a better policy through Congress, but people forget that Paul Volcker didn't have to push his interest rate increases through a skeptical, angry, and often stupid legislature.
And another, referring to economist Simon Johnson's claim that a financial oligarchy has seized control of our government:
Johnson is right that the power of financial interests warped policy in recent decades, leading directly to this crisis. I just don't think it's correct to extend that argument to say that the Obama administration is primarily constrained by the will of the financial oligarchy.
I agree with Ryan on both these points, but they got me thinking about all the possible explanations for the Administration's go-slow approach (as opposed to seizing at least a few big banks and forcing everybody to take much bigger writedowns of bad assets than they have so far, which I think is what Johnson, Paul Krugman, and Joe Stiglitz all want). Here's what I came up with:
1. It's the proper course of action, because most banks will be able to earn their way out of their problems if given some time and forbearance by regulators. This is what people within the banking industry seem to think, and non-banker John Hempton has done a good job of articulating this view on his blog.
2. Seizure and writedowns might have been the proper course of action last year, but now that Treasury and the Federal Reserve have already put up trillions of dollars, backed by the very loans and securities that would have to be written down, it would be spectacularly costly to the government. It also might wipe out large swaths of the insurance industry, because insurers own lots of bank preferred shares and debt. So letting the banks slowly and fitfully earn their way out trouble is really the only alternative at this point. So sayeth David Goldman.
3. Treasury has just been getting all its ducks in a row to prepare to do eventually exactly what Johnson, Krugman, et. al. want it to do. This was a view I was pushing a few weeks back. I've gotten more skeptical since then.
4. Geithner and his pals in the White House would love to follow Johnson and Krugman's advice, but it would require hundreds of billions, maybe trillions of dollars more in up-front appropriations to keep the banking system solvent. And Congress is too "skeptical, angry, and often stupid" to approve anything like that.
5. Geithner and his pals in the White House would love to follow Johnson and Krugman's advice, but they are afraid the powerful banking industry will find ways to thwart them—through both lobbying and lending decisions.
6. Geithner and his pals in the White House are all willing tools of the financial oligarchy. Especially Larry Summers.
Am I missing anything? I'd say there's at least a bit of truth in all six. Nos. 1 and 4 are currently my favorites, but I reserve the right to change my mind.
Update: A well-informed reader adds explanation No. 7: That Geithner and his pals at the White House and in the bank regulatory agencies are afraid that if they overtly nationalize some banks, that would start a run to them from other banks that are wobbly. And even if Congress were happy, trusting, and often smart, it might not be able to get enough money together to nationalize all the banks. (I don't really buy this argument—if it were true, wouldn't everybody be rushing to do business with the all-but-nationalized AIG and Citigroup? But it may reflect at least some people's thinking along Pennsylvania Ave.)