fhwang.net

Obama and the financial crisis

This morning the Obama administration officially announced Tim Geithner’s bailout plan. You probably won’t be surprised to hear that I’m with Paul Krugman and Barry Ritholtz in opposing this, and insisting that the only solution will come when the government shuts down the bad banks and let new banks rise in their place. What’s particularly criminal is that the FDIC loan guarantees appear to be a backdoor subsidy, enacted through a mechanism that might be complex enough to confuse people while Wall Street slips its hand into the public purse one last time.

Why is this happening? My armchair analyst guess goes something like this:

I’d guess that Geithner isn’t trying to scam the public: He’s just deluding himself. The phrase I keep hearing on this is “cognitive regulatory capture”, a state in which the regulator of an industry starts to believe the worldview of those he or she is supposed to regulate. A lot of Geithner’s Wall Street associates lost tons of money betting that these assets were worth something, and they might still think that. The plan is certainly predicated on the belief that the market is treating these assets unfairly, and Geithner might honestly think the federal government won’t lose that much money by stepping into this market. It’s can be painful to have strong disagreements with your friends.

As for Geithner’s boss, Obama: He’s smart as hell, a phenomenally talented politician, and I was happy to vote for him. I’d vote for him again in a heartbeat. But he’s not an economics or finance nerd—those guys don’t do so well in electoral politics—so he has to listen to his appointed experts and go by his gut. His experts aren’t any good, and his gut reaction might be serving him poorly here.

Most of the time, Obama’s modus operandi seems to be something like this: First, he spends a lot of time listening to everybody in the room. Then, he figures out roughly where the middle ground is, and steers that middle ground towards his own personal proclivities, just a little. That way everybody gets a little of what they want, and trust is built up for future dealmaking. It’s a style that is probably extremely effective 99% of the time, because the right solution is usually represented by somebody in the room, and the consensus solution won’t deviate too much from that (unknown) right solution.

But what if this financial crisis is the other 1% of the time? What if the person who knows what’s happening isn’t anywhere in the room, but actually outside the building, across the street, standing on a soapbox and trying not to sound crazy? The economists who saw this problem coming—Nouriel Roubini is the most prominent example, but certainly not the only one—aren’t exactly loved by Wall Street bankers or by their friends in the Treasury Department. If voices like his are given no representation, then Obama’s conciliatory, consensus-first approach could fail, and fail hugely.

Obama has finite capital, both financially and politically. I’m getting very concerned that this issue is his perfect storm, and that as a result of this the rest of Presidency will not live up to its promise. I hope I’m wrong.

blog comments powered by Disqus
Tagged: obama, finance

« Previous post

Next post »