The Magazine

Geithner Lays an Egg

And that's only one of the problems with the Obama economic strategy.

Feb 23, 2009, Vol. 14, No. 22 • By LAWRENCE B. LINDSEY
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The shreds of comity on which Washington depends were saved by Senator Susan Collins of Maine, who drafted a compromise that eliminated some of the most wasteful spending and sped up other parts. The bill that emerged from conference is close to the Collins compromise and is better than the House one at moving spending into the present. The Congressional Budget Office estimates that a quarter of the spending in the conference agreement would leave Washington this year and a total of 75 percent by the end of 2010, a substantial improvement. But it is still not "stimulus," and that fact is going to become apparent later this year. Money leaving Washington for state capitals is different from money actually entering the economy and creating jobs.

The administration released a report by its top economists saying that passage of the stimulus bill would mean that national unemployment would peak in the third quarter of 2009 at about 8 percent and start going down thereafter. Let's just say that we should all hope they are right. The economy will get a pop from the start of stimulus just as the economy got a pop in 2008 from the one-time checks that were sent out. Growth in the second quarter of 2009 is likely to be positive as the first round of stimulus hits the economy. As the rate of new stimulus slows in subsequent quarters, growth will turn negative again. The odds are high that unemployment will still be rising on the first anniversary of the Obama presidency next January with the prospect (but not a certainty) of double-digit unemployment at the time of the midterm elections.

As the stimulus bogged down, a new word crept into the administration's economic policy vocabulary--"comprehensive." The problems would not be easy to solve, and stimulus alone was insufficient. Bank recapitalization and housing mortgage issues would also have to be dealt with. The task for announcing these was delegated to Treasury Secretary Timothy Geithner. But the scripting of the message and indeed the whole "rollout" of the issue was tightly controlled in the West Wing.

Like so much of what happens in Washington, the reasons for this odd locus of decisionmaking authority are less nefarious than meets the eye and more a matter of simple necessity. The first problem is a lack of personnel at Treasury. Geithner is the only confirmed appointee in the department. No deputy secretary, no undersecretaries of either domestic or international finance, no assistant secretaries, no deputy assistant secretaries. The West Wing is the only place where the personnel reside who can make decisions.

The second problem is political. There are no easy answers when facing a trillion-dollar hole in the banking system. Either the banks will fail, or money is going to have to be given to the banks to fill the hole, or the proverbial can will be kicked down the road with enough money being slowly injected into the system to keep it going. The first option is a nonstarter. This brings the essential choice down to writing a big check now to the banks or writing a lot of little checks over time, and bankers are not the most politically sympathetic recipients of federal largesse at the moment.

So there is a political incentive to create a focus on issues that are tangential to the trillion-dollar problem. Make sure that bankers sell their corporate jets! No more bonuses!

The sale of 50 corporate jets in today's market might fetch you $1 billion if you're lucky. End all the bonuses on Wall Street and you get real money--another $18 billion. Put the two together and a $1 trillion problem shrinks to a mere $981 billion one. The administration's hope was that such measures plus the group flogging of the CEOs of the big banks on the Hill last Wednesday would focus the media, Congress, and the public away from the fundamental enormity of the task at hand.

But Geithner still had to say something, and none of the various options available was attractive. Buy the assets from the banks? Set the price high enough to bail out the banks and you have a trillion-dollar overpayment. Set the price at current market prices and you have to come up with the same trillion as a bank capital injection. Do what Bill Seidman and the George H.W. Bush administration did during the S&L crisis by nationalizing the banks and then reselling the pieces into the market? Might work, but while Seidman disposed of the thrift industry by selling them to the basically healthy commercial banks, there aren't any basically healthy banks left on the planet to buy an institution like Citibank or Bank of America. Combined, those two institutions have 14 percent of the deposits in the American banking system, and there are plenty of other banks that need help as well.