Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

11 February 2009

Geithner’s Outline Gets “D” for Accountability

[For an upstaged recent post on war lessons, click here.]

In life as in school, outlines don’t get full credit. Treasury Chief Tim Geithner gave us a bare outline yesterday, and the stock markets gave him a “D.” It was a generous grade.

Economists on the Lehrer News Hour said the markets plunged because the plan was “vague.” But I think Maureen Dowd’s column today got it just right.

The markets plunged because the plan has no accountability. Not a single head will roll. Shareholders of bailed-out firms will lose nothing. Not a single bullet point—vague as they all are—reduces moral hazard. Only the top five executives of each bailed-out firm will have their plush pay restricted. The rest can continue to reap excessive pay for failure and charge taxpayers for it.

Maybe on financial theory alone the plan earned a C-. If you just look at numbers and categories, there is change you might believe in. Paul Krugman tried to see the bright side, saying there is “a possible interpretation . . . which makes it a good plan.”

But politically the plan is an unmitigated disaster. It alienated everyone. The Wall Street types don’t like it because it doesn’t rule out nationalizing the financial institutions they ruined. Even Krugman saw stress-testing of banks as a “Trojan horse to smuggle” nationalization in.

The public doesn’t like Geithner’s plan because, after eight years of government rewarding failure, the plan does it again. It’s a plan by, for and of the country-club set, without even a slap on the wrist for stupidity and greed. You don’t need a poll to see how that plays on Main Street. And if you think Geithner’s Website is going to discipline the Masters of the Universe, I have some subprime derivatives I’d like to sell you.

Right now, politics is as important as economics—at least such economics as the Masters of the Universe may know. What we have is a massive, nationwide failure of confidence. That’s a political problem as much as an economic one.

The loss of confidence is well deserved. During the last eight years, every institution in our society failed us, with the possible exception of the military. Our financial system failed us spectacularly. We’re not going to restore anyone’s confidence until we replace the dopes that caused this mess and impose a visible price for their failure.

Believers in the fairy tales that destroyed our economy say that markets will punish failure. But they won’t if government bails out failures and continues paying them excessive compensation. And, in case you hadn’t noticed, markets aren’t working very well right now. That’s why government must step in.

So somebody has to play the adult and impose discipline. The military can’t do it because of the Posse Commitatus Act. By default, that leaves our federal government—the only national institution left standing, and the one the electorate just invested its votes and hopes in.

But Wall Street’s mystique creates a barrier. It’s as if its bankers belong to a secret society of wizards.

Look, guys and gals. Banking ain’t nuclear physics, or even rocket science. You loan money at a higher interest rate than you pay for deposits. You keep the money vaults locked at night. You make sure people who borrow can repay the loans. If you securitize, you keep things simple, make sure all the loans in a package have the same terms, and make sure buyers understand what they are getting. Then you use rating agencies that are honest and know how to assess the risk of markets going down.

That’s about it. Yet somehow a member of the secret society like Tim Geithner can intimidate people like Larry Summers, David Axelrod and maybe even the President himself—all of whom are far smarter.

If it were up to me, here’s how I would clean up the mess. I’d scour the country for good city and regional bankers who didn’t leap into the subprime cesspool and whose banks have been solvent and making money for the last two years. Then I’d bring them to Washington and put them in charge. Oh, and one other thing: I’d tell them “Feel free to fire anyone in a bailed-out firm who you think has made stupid decisions or who won’t jump at your orders.”

I worked and voted for President Obama because I wanted brains, judgment, and accountability back in Washington. Now Geithner looks like a more articulate Paulson. I’m beginning to think all Wall Street folk know the secret handshake and can find a way to reward their buddies no matter what the circumstances.

Neither the public nor the markets will buy it. Not this time.

The whole thing reminds me of the commuter-train disaster in Amagasaki, Japan in 2005. A twenty-three year old driver going too fast took a seven-car commuter train off the tracks and rammed it into an apartment building, killing 107 and injuring 549. The rules apparently encouraged his haste by demanding on-time performance above all.

Now Geithner wants to put the same guy back in the driver’s seat the next day, without changing the rules and without knowing whether he was asleep, drunk, angry, or guilty of nothing more than responding rationally to the system’s skewed incentives. Not only that: Geithner wants to let him give himself a bonus with taxpayers’ money.

You don’t have to be a skilled politician or know anything about finance to understand why that won’t fly. Most people think we’ve got to change both the rules and the driver. And they’re not going to get back on the economic train until we do. They’d rather keep their money in their mattresses. Can you blame them?

So our first job is not to get rid of bad assets. It’s to get rid of bad people and restore the personal price for failure that once made our markets robust and our nation great. If we do that, time and the markets will do the rest. Unless we do it, the economic freeze will get so deep we’ll begin to hear things crack.


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