Bailout battles

Posted: 30 July 2012 in Uncategorized
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Yep, they’re still battling over the terms of the bank bailout—and rightly so.

The current battle is between Team Tim (Geithner) and Team Neil (Barofsky), the actual bailout of the banks versus the never-enacted bailout of homeowners, with Matt Yglesias stepping in to try to referee the dispute.

Team Tim would say that they’re trying to create a well-capitalized banking system in order to bolster the broader economy. Team Neil counters that the broader economy would be better served by a policy that imposed steep losses on banks and instead repaired household balance sheets. Beneath all the anger and accusations and counter-accusations is a fairly wonky policy disagreement about the relative importance of household balance sheets versus the credit channel to laying the preconditions for growth.

So who’s right? I think this is actually a much more difficult question than partisans on either side are willing to acknowledge. Team Tim has bolstered their argument with the overblown notion that homeowner bailouts “launched the Tea Party” via Rick Santelli and are therefore politically impossible and thus one doesn’t even really need to address the merits of the case. On the other hand, Team Neil has never really presented a coherent alternative course of action that takes real account of the consequences of imposing very large losses on the banks. From the original winter 2008-09 argument over bank nationalization along Swedish lines, I’ve rarely heard it acknowledged that these courses of actions would likely have required hundreds of billions of dollars in additional “bailout” money. I think that still would have been the optimal policy, but it’s not a no-brainer and I think the administration’s left-wing critics would have been very disappointed if the White House made universal health care take a back seat to a second round of bank equity injections.

What Matt fails to recognize is that the bailout of the homeowners could have been made a precondition for the bailout of the banks.

I actually agree that, in the fall of 2008, the banks needed to be bailed out. Otherwise, the entire world economy could have come tumbling down.* I do think we came that close. At the same time, Washington was in the position to require that the banks write down the mortgages they’d profited from during the preceding decade. And, if the banks wouldn’t agree to that condition, they could have been nationalized.

That’s the simple policy option neither administration followed. Not Bush (with Paulson, Bernanke, and Geithner), and not Obama (with Geithner, Bernanke, and Dudley).

And now we’re paying the consequences, in the midst of the Second Great Depression.

*Let them lie in the beds they made? Well, the problem was, the rest of us were under the beds and would have been crushed if they had collapsed.

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