I thought of this when listening to an interview Adam Posen did for Monday’s Planet Money (beginning around the 6-minute mark). The Geithner Plan had not yet been announced, but Posen already had the right diagnosis: wishful thinking. The administration, on his analysis, is hoping that it will be able to turn the economy around without having to take tough measures with the banks.
Martin Wolf puts it this way:
[H]oping for the best is what one sees in . . . the new plans for fixing the banking system. . . .
The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive.
I also thought this was particularly insightful:
Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress.
It does seem like Geithner’s proposals are a kind of effort to piece together a solution given those three constraints, ultimately founded on the hope that the underlying problems are not all that serious. But I’ll stop there. Sometimes we bloggers compete to come up with marginally more interesting ways of telling the same story. For today I’ll just recommend reading all of Wolf’s post.
Originally published at the Baseline Scenario and reproduced here with the author’s permission.