Noam Scheiber writes:
While questioning Treasury nominee Tim Geithner at his confirmation hearing this morning, Sen. Chuck Schumer said he spent some time calling around Wall Street this weekend, and what he heard was that if the government wants to clean out all the toxic assets from the financial system, it will cost some three to four trillion dollars. Which is to say, an order of magnitude larger than the second $350 billion in TARP money the Senate just approved.
The trouble here, of course, is that while Wall Street executives are in an unparalleled position to know what’s needed to get the financial sector back in good health, they’re also incredibly poorly positioned to separate the public interest from their own self-interest. And much the same goes for Chuck Schumer. Schumer’s constituents, even those who aren’t wealthy Wall Street titans, tend to have interests that are very bound up with those of Wall Street.
Noam observes that since absent a healthy financial sector it’s hard to imagine an economic comeback, “the only thing worse than spending $3 trillion to clean up the banks may be not doing it.” And that may well be the case. But this is, to my mind, a huge part of the reason why it’s important to keep nationalization firmly on the table as an option. It seems that the public is going to have to spend vast sums of money to clean up other people’s messes. Under the circumstances, it’s vitally important to minimize the extent to which the money winds up benefiting the very same people who made the mess. The rhetoric of “clean[ing] out all the toxic assets” is misleading. We’re not talking about land with toxic waste lying on top of it that’s expensive to clean. We’re just talking about assets that banks paid a lot of money for but that turn out to be worth much less than they thought. You could “clean” them for free—the banks would just need to write down the losses. What they’re saying isn’t that cleanup is expensive, but that bringing the banking system to solvency requires someone to give the banks trillions of dollars to make up for all the losses they squandered.
That sucks, but something big probably is necessary. But there are two ways to do it. On one path, we take only those banks who are truly insolvent, nationalize them, then give the vast sums of money to the nationalized enterprises, and then eventually re-privatize those enterprises. Owners and managers of financial institutions will try their best under those circumstances to just eat their losses and not wind up getting nationalized. That will minimize costs (which will still be large) and reprivatization will allow the government to recoup some of the upside. On the other path, we just give free money away to all comers. Calling around on Wall Street will, I’m sure, generate a lot of support for the “free money” option but that doesn’t make it a good idea.