The Geithner Interview

I finally got around to listening to Tim Geithner’s interview with Adam Davidson for Planet Money. (Simon already commented on it.) I had two main reactions.1. Around the 14:30 mark, in response to a question about the problem of valuing bank assets, Geither said this:

If somebody asks you, “what’s your home worth today?,” your answer to that question would be dependent on whether you had to sell it today, or you were planning to sell it in three years . . . or you were planning to sell it in ten years . . . So that basic challenge of trying to figure out what your home is worth, or what any asset is worth, depends a lot on how long are you’re going to hold it, and it depends a lot on whether there’s going to be financing available to people out there who might buy it. And in the absence of financing, if you had to sell it today, it would be worth a fraction of its basic value. Now, what’s happening in our market today is that we have just a broad shortage of financing available. And what the government needs to do in that context . . . is to try to make sure that the government and the central bank together can provide the financing to help get those markets working. And that will make it more likely that these assets are worth and will have the value that is their basic inherent economic value rather than an artificially depressed value that reflects the absence of financing and credit.

Yes, someday the economy will start to recover. And yes, someday it will be easier to get a mortgage (although it should be noted that mortgage rates are historically low right now, so mortgage rates will probably be higher in the future). When the economy starts to recover, housing prices will start going up. But we have no idea where the bottom will be, and so there is no assurance that even in ten years you will be able to sell your house for more than you paid for it. There isn’t even any assurance that you will be able to sell your house for more than it is worth now. If, as some people believe, housing prices still have another 20% to fall, it could take ten years to make that up. And there are some people who argue that, in the absence of increasing population density, there is no reason for real housing prices to go up at all.

The idea that houses have a “basic inherent economic value” other than the prices they can fetch in the housing market is, I think, a fallacy. And so the idea that therefore houses will naturally return to some “basic inherent economic value” that is higher than current market prices is, I think, wishful thinking of the kind that has hampered responses to this crisis from the beginning. They could; but they could just as well not.

2. Near the end, when Adam Davidson was trying to get Geithner to say something, anything, about nationalization, he said this:

It’s not the right strategy for our country for basic practical reasons that our system will be stronger if it remains in private hands with support from the government to make sure those institutions can play their critical role going forward.

I listened to the end but I didn’t hear any “basic practical reasons.” To be blunt, it sounded like the “private is better” mantra we heard from the Bush administration, and (to a slightly less extent) the Clinton administration before them. Sure, most people agree you don’t want all individual lending decisions being made by bureaucrats in Washington, but that’s just a straw man. There are valid reasons to debate whether nationalization is the best solution; in particular, if you were to take over Citigroup, even for a short period of time, would that immediately weaken Bank of America so much that you would be forced to take it over the next day? And what about JPMorgan Chase? But that’s not what Geithner said. He said “private is better.”

Now, maybe that’s just because Tim Geithner doesn’t want to get into a serious debate about the merits of government takeovers on national radio, because he’s afraid of the impact that might have on the markets. I respect that. But let’s hope that when they have these debates in private, they don’t just write “private is better” on the whiteboard and call it a meeting.

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

4 Responses to "The Geithner Interview"

  1. Anonymous   March 1, 2009 at 8:20 pm

    It’s funny that the government’s solution to re-inflating prices is to replace the leverage that was provided by the shadow banking system (the SIVs, levered funds, etc). I understand this to be the purpose of the TALF. That doesn’t get prices back to an “inherent value” but gets them back to a levered value. Maybe its the only way to prevent massive price declines from sticking for a decade or more. But it feels like treating the junkie with the drug that got him high in the first place.I used to work for the Federal Reserve and warned Geithner’s top people how fair value accounting and leverage was responsible for the magical ever-increasing EPS and how leverage was agnostic and could cause drastic price declines resulting in major bank insolvencys. My concerns were brushed aside by the public policy majors they had running the show at the largest banks..