They're dead wrong.
You've read them. Treasury Secretary Tim Geithner's plan to end the financial crisis is a disaster. The Obama administration has even less grasp of the issues than the Bush team.
You've seen them on TV. The Geithner plan is folly. The administration is in meltdown.
And, of course, Wall Street has weighed in, first with a 382-point drop in the Dow Jones Industrial Average ($INDU) that began even as Geithner was still reading from his teleprompter and second with an orgy of finger-pointing. If only the plan had more details, more originality, more money for Wall Street.
Sorry. But the doomsayers, the nattering nabobs of negativism and the self-interested Wall Street experts are all wrong. The plan isn't perfect. It does represent a last-minute change in direction, and essential details are still to be announced. The presentation could have been better. (Who's Geithner's media coach? Lurch? Keanu Reeves?) And the administration should have done a better job of lowering expectations.
A decent planDespite almost everything you've read or heard, the Geithner plan stands a good chance of working. It tackles, head on, the three big problems that anyone trying to end this financial crisis must face.
Of course, because it's the best plan that anybody could come up with at the moment -- the team that came up with this plan included the Federal Reserve, White House economic advisers such as Lawrence Summers and the skeleton crew running the Obama administration's Treasury -- we're really in trouble if it doesn't work.
OK, you probably disagree with almost everything I've written so far. So let me tell you why I think this is a good plan.
From all accounts -- and The Washington Post has done a great job at explaining what ingredients went into this piece of sausage -- discussions to come up with a plan to stabilize the financial system originally focused on two ideas: A so-called bad bank would buy up distressed financial assets to get them off other banks' balance sheets. And the government would extend more guarantees to banks against catastrophic losses on their portfolios along the lines of the guarantees already offered to and .
Sent back to the drawing boardBut that plan kept running up against three problems, problems so big that they doomed it to failure, the Treasury team finally concluded:
- It would be so hugely expensive that the administration would have to ask Congress for more money at a time when any bailout for Wall Street and the banks was horrendously more unpopular than the stimulus package that had just scraped through the Senate.
- It would leave the government with the job of deciding how much any of the banks' distressed assets was worth. Not exactly an easy job when many of those assets have stopped trading.
- It wouldn't give the government much negotiating muscle with the banks. The banks, in fact, might still think of themselves as in the driver's seat if they concluded that the government believed they were too big to fail. That would cost taxpayers money and make it just about impossible to craft a deal with any teeth. Without teeth -- something to take a bite out of banks, their CEOs and their shareholders -- it would be impossible to sell any plan to Congress and voters.
So instead of the bad-bank/guarantee plan, we have the Geithner plan, understandably vague in its details because it was hastily put forward as a replacement. But even in its vagueness, the Geithner plan promises a successful solution to the problems that sank the Bush administration plan and the original bad-bank/guarantee plan discussed within the Obama Treasury.
Diagnosing banks, dispelling uncertaintyFirst, the Geithner plan addresses the political impasse. Everybody hates the idea of giving the banks any more money. Nobody in Congress would vote for another cent to bail out Wall Street. To fix this problem, the Geithner plan relies on a risky strategy: Government regulators have just started to apply a "stress test" to 20 of the country's biggest banks that's likely to show that some of these brand names are insolvent under honest accounting rules. Currently, many people suspect this, but suspicion and belief aren't enough to carry the day. We need to know to a gut-wrenching, headline certainty. We need to turn on the TV and see channel after channel intoning, "The banks are broke."
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In short, we need a demonstrated increase in the seriousness of the crisis to build political support for doing something. There's no guarantee that even scarier headlines would get Congress to act or convince enough voters that the emergency requires action. That's the real risk: that the stress test will show the banks are insolvent but that no one will do anything about it.
Second, forcing the crisis would change the balance of power between government and the banks. Once the assets on their books were honestly valued and banks were facing the specter of insolvency, they'd have to abandon their hope that if they just hold on long enough this stuff will be worth 80 cents on the dollar again. To buy time, they've hoarded every cent the Federal Reserve has thrown at them to build up capital so they can write down these assets a bit at a time instead of selling them off.