Yes We Can…Continue the Bush Administration’s Horrible Financial Policies

Another (possible) tale on the perils of post-partisanship. It seems there is bad news from the new treasury secretary on the emerging policy on dealing with the financial crisis:

Mr. Geithner declined to provide any specific details or to address rising calls for the creation of a government institution to buy or guarantee the declining assets at several of the nation’s largest banks. He discouraged speculation that the plan would include the nationalization of some banks.

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” he said.

But bank stocks surged on hopes the government was moving toward creating a “bad bank” to purge toxic assets from balance sheets that are rapidly deteriorating as the economy worsens. On Wednesday, the Federal Reserve cautioned that the economy was still spiraling downward on many fronts.

Paul Krugman refers to the policy as Hankie Pankie II. The plan to create a bad bank doesn’t deal with the possibility of zombie banks, or moral hazard. It leaves the people who got us into this situation in charge.

Arthur Jensen Has Had His Say

Arthur Jensen Has Had His Say

The plan has led some responsible, well informed commentators to suggest Tim Geithner still thinks he’s working in the private sector:

I’ve been closely following the various (new & improved!) bailout plans for the big banks — from the modified TARP to the recapitalizations to the “bad bank” plan.

I’ve noticed something I find a bit disturbing about our new Treasury Secretary: He has not yet fully come to terms with his new job, role — and boss. Granted, he’s been in the job for only two days. But given the extraordinary circumstances the financial sector and the economy is in, it is important for the Treasury Secretary to get up to speed as soon as possible. [Snip]

No! Defending these idiots was your old gig. In the new job, you no longer work for the cretins responsible for bringing down the global economy. Please stop rationalizing their behavior, and preserving the status quo!

Yesterday’s 13% surge in bank stocks is a clue as to what an obscene taxpayer giveaway this “bad bank” plan is — its free money for the firms that caused the problems, many of whom still have the same incompetent  management in place that caused the problem. Purging toxic assets from bank balance sheets, without punishing the management, shareholders and creditors of these institutions for their horrific judgment will only encourage more of the same in the future. Its moral hazard writ large.

Perhaps the emerging, elite oriented, hesitant position that seems to be gathering steam as administration policy is the result of a lack of Team of Rivals on economic policy.

he deep ideological divide that is emerging in the economics profession between those who worried about manic neoliberalism and Bob Rubin-style turbo-charged tilts towards an increasing unregulated finance industry is not hitting the Obama administration – because it is only hiring one side of that divide.

As best I can tell Obama is stacking his team with those who George Soros disdainfully calls “market fundamentalists.”

I sincerely hope that Obama’s famed lack of partisanship is something other than technocratic centrism. The current crisis requires strong leadership, not an outsourcing of the policy to the same group of policy makers that created the conditions for the original problem. We need more Robert Reich, Paul Krugman and Joe Stiglitz and less Larry Summers, Hank Paulsen, and Tim Geithner.

Banking Crisis Link Dump

Or the things I would be posting about if I wasn’t busy with school:

What Obama Must Do: An Open Letter to the President by Paul Krugman – Rolling Stone’s musical coverage is about fifteen years past it’s prime, but their political writing is top notch. Krugman lays out his vision of the needed policy changes to avert a complete financial calamity.

One Idea for Bank Crisis: Quarentine the Bad Assets – It seems the spector of using the word nationalize is scaring off policy makers from the idea that makes the most sense. Sweden successfully implimented a similar policy in the early 90s and it was much more successful than Japan’s approach – which we are more closly mimicing.

Barney Frank on the Financial Crisis – Frank is the Chairman of the Finance Commitee in the House and could oversee the plan Krugman and the Post article advocate for. I find his explanation for why it isn’t happening somewhat unconvincing.