In today’s speech, being delivered right at the moment, Barack Obama offers a rationale for why they’ve avoided nationalization of large banks that I think is different from what we’ve heard before:
On the other hand, there have been some who don’t dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear – the reason we have not taken this step has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.
Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. Governments should practice the same principle as doctors: first do no harm. So rest assured – we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. To that end, in addition to the program to provide capital to the banks, we have launched a plan that will pair government resources with private investment in order to clear away the old loans and securities – the so-called toxic assets – that are also preventing our banks from lending money.
This I think is close to right. Though the real issue, I think, is less that a takeover would cost “even more in the end” than it is that a takeover would cost even more in the beginning. To do it, the administration would need to get congress to authorize a frightening level of expenditure that congress is, frankly, unlikely to agree to. The virtue of the PIPP is that it might work, and it can be done with existing authority. Many experts would say that to think the PPIP will actually be enough money in the end, and thus fulfill what Obama is promising here, is wishful thinking. And it very well may be wishful thinking. But given the real institutional and political constraints, it’s not clear to me that the administration has any better path available to it in practice. PPIP should do some good, might work, and if it doesn’t work then they can try to convince congress that the time has come for desperate measures.
What’s disappointing about this section of the speech is the incredibly vagueness about what will happen if stress tests prove that banks need additional government capital: “where this is not possible, and banks require substantial additional resources from the government, we will hold accountable those responsible, force the necessary adjustments, provide the support to clean up their balance sheets, and assure the continuity of a strong, viable institution that can serve our people and our economy.” What does that mean?
I liked Obama’s capsule explanation of the paradox of thrift:
You see, when this recession began, many families sat around their kitchen table and tried to figure out where they could cut back. So do many businesses. That is a completely responsible and understandable reaction. But if every family in America cuts back, then no one is spending any money, which means there are more layoffs, and the economy gets even worse. That’s why the government has to step in and temporarily boost spending in order to stimulate demand. And that’s exactly what we’re doing right now.
I also think the thing about the Sermon on the Mount that he hasn’t said yet but that I’ve already read in the prepared text is pretty good.