Brad DeLong had a good post a couple of days ago outlining three different narratives about bank rescue policy that he thought might explain what the Obama administration is doing with the banks, followed by the observation that “I do not think that it is selling any of these narrative lines to make sense of its policies. Indeed, I do not know what the narrative story it wants to tell about the current situation is.”
1. The banks have us by the plums: Keeping the economy near full employment requires pushing asset prices back up to values at which businesses selling stocks and bonds can obtain financing that makes it profitable for them to expand. But pushing asset prices back up enriches the bankers whose overleverage got us into this mess, and prevents them from suffering their just punishment. There is no way out of this dilemma, but the Obama administration is trying as hard as it can given the limited authority congress has granted it to maximize the gain to employment and minimize the support provided to financial princes.
2. The government has a chance to make a fortune: Just as in 1999 and 2005 financial markets were ruled by irrational exuberance, now they are ruled by irrational pessimism. Because of this irrational pessimism, businesses selling stocks and bonds cannot obtain financing that makes it profitable for them to expand–and so unemployment is high. But the government is not irrationally pessimistic, and is “patient capital”: the government can buy up financial assets and so raise their price, boost employment, and then hold the assets until maturity and very likely make a fortune. It can do good for the economy and the country and do well by its own finances at the same time. It is true that financiers who ride-alongside, front-run, and manage the government’s portfolio are very likely to make fortunes too, but much smaller fortunes than the government.
3. We have to play out the hand before we ask for a New Deal: Perhaps the situation can be cured with relatively minor support for the banks. Perhaps the situation will require full-fledged bank nationalization. Bank nationalization could not pass the Senate now. Come this fall, it may be needed–but it will only be clear that it is needed if the Obama administration has done its best to rescue the banking situation with the powers it has at its current disposal. You cannot ask for a New Deal until you have played out your hand.
Yesterday, it seemed to me that Barack Obama was making a fourth and tougher claim, namely that the PPIP approach would save money relative to nationalization. I share D-Day’s skepticism that this will actually be true when all is said and done. Arguably, though, what Obama was saying amounts to a kind of blend of number two and number three.
Meanwhile, I’m beginning to get the sense, based on some things I’ve heard from people who’ve had more contact with the key players, that there’s disagreement between high-level policymakers about whether (2) is true or (3) is true. The administration has hit on a policy approach that can be agnostic between (2) and (3) but that agnosticism makes it difficult to articulate a clear theory of the case. It also might lead to some hidden ambiguities in terms of the details of implementation.