The Republican prescription: Do nothing

A congressman asks the banking CEOs: Why not let the magic of the market fix Wall Street?

By Andrew Leonard

Published February 11, 2009 5:54PM (EST)

Randy Neugebauer, R-Texas, asked the banking CEOs assembled in Washington Wednesday morning why we just don't "let the market work these things out."

(UPDATE: In my haste transcribing the live hearing, I originally identified the Congressman asking this questions as Rep. Jeb Hensarling, also a Texan Republican.  That was a serious error, brought to my attention  by Hensarling's office, and I regret it.)

He was referring to the critical issue of how to resolve the value of the "toxic assets" held by financial institutions. The emerging hard-line Republican position appears to be that the government should not attempt to solve the toxic asset problem by purchasing these assets from the banks itself through some form of "bad bank" strategy, or by coming up with an as yet unspecified scheme to backstop private efforts to purchase these assets at prices higher than what the private sector is currently willing to pay. Instead, the reasoning seems to be, if these assets have such a low value because no one wants to buy them, then the banks just have to suck it up and accept reality. As Sen. Bob Corker, R.-Tenn., said on Tuesday, maybe it's time to just "take our medicine." Nobody ever said the free market would be easy!

(NOTE: I now believe I misinterpreted Corker's position in my post yesterday, when I wondered if he was suggesting that the government should step in and pay whatever it takes to solve the problem.)

Vikram Pandit rejected the idea that Citigroup should be selling off its vast holdings of toxic assets at the (nonexistent) prices the market is currently willing to pay. His ostensible explanation was that the assets aren't really worth that little -- basically: the prices aren't fair. So he wants to wait for a better price.

The real reason, however, is that Citigroup would no longer continue to exist as a financial institution if it booked the losses that would be entailed by recognizing what the market currently thinks its assets are worth.

So let's be absolutely clear what Neugebauer is recommending. For starters: the bankruptcy of Citigroup and Bank of America.

Conservative Republicans aren't the only people in the United States who wouldn't mind seeing Citigroup and Bank of America fail. There is a great deal of populist anger at Wall Street that crosses political boundaries; an entirely understandable desire to see the companies that helped catalyze the current economic contraction pay for their sins.

But is this a realistic position? The failure of Lehman Brothers set off a global economic crisis and Hank Paulson and Ben Bernanke have been castigated ever since for allowing it to happen. Citigroup and Bank of America are far larger than Lehman Brothers. Allowing them to fail would likely constitute a shock to an already damaged economy greater than anything we have experienced since the depths of the Great Depression. If you want to encourage the mother of all bank runs, then you let Citigroup or Bank of America go down.

That does not seem to me to be a realistic option. Let the market work these things out? Isn't that how we got here in the first place?

UPDATE: I should note, there is a critical difference between just letting the banks fail, and a government-mediated financial reorganization that to all intents and purposes would be equivalent to a temporary nationalization, as outlined in this interview Josh Marshall conducted with Joseph Stiglitz last Friday. I don't think that's what Randy Neugebauer has in mind.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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