Arnold Kling  

Rare Agreement?

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one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.
Hear, hear. That is James K. Galbraith, whose political views diverge considerably from mine. But the issue of what should have been done with the banks breaks more on outsider-insider lines than on ideological lines.

If Galbraith and I are correct, then President Obama's embrace of Geithner and the bailouts was a history-altering mistake. If Obama had followed our advice, perhaps the economy would not be in such bad shape and, more important, perhaps I would not have suffered the humiliation of losing my bet with Bryan on electoral outcomes.

But, of course, if you are an insider, the counterfactual history is that we would have had another Great Depression. Note that repetition of such a claim does not constitute proof.

Thanks to Mark Thoma for the pointer.


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COMMENTS (6 to date)
Lee Kelly writes:
But, of course, if you are an insider, the counterfactual history is that we would have had another Great Depression. Note that repetition of such a claim does not constitute proof.
But repetition that Hoover was a laissez faire fundamentalist seems to have constituted proof; I don't see what the difference in this case. Future policy is not based on the facts per se, but how those facts are spun.
Stephen Smith writes:
Note that repetition of such a claim does not constitute proof.

As much as I agree with most of your economics and politics, that sort of polemic ("My opponents have no arguments") is not helpful. Most people probably don't notice when you do it since it's so common in political discourse, but I notice, and it's annoying. The "insiders" definitely do have a huge bevy of data and theory to back them up. I happen to think their evidence is either wrong or poorly applied, but it's a bit dishonest to portray the opposition as having no arguments.

Lord writes:

Well, legally the FDIC isn't empowered to handle institutions as large as this. Their preferred methods, merger or sale, would not be available, and they would have to run them for a considerable amount of time while doing this, and there is no certainty they could accomplish this even if they tried. Even liquidation would likely take years given their size and complexity. Reality is much messier. That is really what it means to be too big to fail. This was just pragmatism, even if not well thought out. A bigger problem would be the Fed compensating for all those losses. Given how little they have done without those losses, who believes they would have done much more if they had occurred? It is unfortunate the cure entailed no significant changes to prevent it from reoccurring and even now the pressure is to free them to do it all over again. It is the old saying if you owe the bank 10k, you have a problem, while if you owe the bank 10m, the bank has a problem, where you are the banks and the bank is the taxpayer. There aren't any easy solutions.

Hyena writes:

You know, sir, that this means "socialism".

Anonymous writes:

Since when do we describe a power grab as a "mistake"? Geithner was Henry Paulson's first lieutenant when the nine largest banks were pressured into selling the government equity shares during the Bush administration.
http://www.nytimes.com/2008/10/15/business/economy/15bailout.html

That's the guy Obama picked to help him reverse the disastrous Bush-era economic policy.

mark writes:

Completely disagree. This is an antiquated model for banking. The financial sector globally is far too interconnected to say, I'll take care of the depositors and stiff arm all the other creditors and every thing will be hunky dory for everybody. There are trillions of derivatives that would be triggered and those are held by other financial institutions and by nonfinancial businesses. But when you have them all triggered at once, you won't have an orderly market to crystallize losses and the uncertainty will create a massive gridlock. There are trillions of intra day loans and check clearing exposure among all of these institutions that would be disrupted - and when the clearing got hung, the uncleared amounts would flow back to the individual and business checking accounts on whic the exposures were created. Massive payment and transaction gridlock. Smaller banks and financial institutiosn would be hit as well. There are hundreds of billions of short term debt and bonds that are held by money market funds, by retirement funds, like Calpers and TIAA CREF and so on, by school districts and universities and those would all be hit big time which would flow back into their purchases and payments of salary and pensions.

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