Listening To The Secretary

Secretary Geithner spoke with NPR’s Adam Davidson today and the result, on the Planet Money podcast, is a helpful guide to official thinking.The Secretary’s best line, at around the 18 minute mark is, ”If you underestimate the problem; if you do too little, too late; if you don’t move aggressively enough; if you are not open and honest in trying to assess the true cost of this; then you will face a deeper long (sic) lasting crisis.”

The contrast he draws is with those who favor a more gradual approach to banking system problems that would “stretch it out.”  After about 17 minutes (and again around 20 minutes), Secretary Geithner contrasts what he is doing with “letting the market sort it out by itself”.

He does not even hint at the possbility that there is a government-led strategy that could faster than what he has in mind.  So could it be that he really has in mind something that will actually be bold and move fast?

I don’t think so.  He says we will “make capital available where it is necessary”.  But he also stresses, in response to Adam’s last question (after around 25 minutes), “[Nationalization] is not the right strategy for the country.”  And Secretary Geithner says clearly “that broad strategy” would do more damage than his policies.

The bottom line is that the government will support the credit system a great deal and in many innovative ways, but Treasury will try really hard to avoid FDIC-type takeovers/reprivatizations of large banks.  This is quite striking, and presumably the hope is that a big “no nationalization” rally in the price of banks’ common equity will turn the tide more generally.

But the government’s stress scenario is quite optimistic, the real economy continues to weaken, and global problems mount.  How much government capital can you put into the banking system until the lack of taxpayer upside becomes quite awkward?  And if that taxpayer upside takes the form of common stock, how do you prevent the state from effectively acquiring a controlling stake in large troubled banks?  Numerous smart people are at work on this problem, but it is probably intractable.

The underlying question is in any case much simpler.  How long can you say, “we are being bold” when in fact you are not?

Originally published at the Baseline Scenario and reproduced here with the author’s permission.