Unhappy with Obama's stimulus package, his housing plan, and his Treasury Secretary's approach to the banking crisis, economist Tyler Cowen is ready to pronounce a verdict on the new presidency: "The simple truth is that so far economic policy has fallen short of being good."
Now, if libertarian-minded Cowen was happy with everything Obama was doing, a great many other people -- including plenty of economists -- would likely be quite distraught. There is no pleasing everyone: Obama is either not doing enough, or is he is doing much, or he is just doing it flat-out wrong. Hey, no one said being President was easy.
I think a case can be made that, given the political constraints, the stimulus package was about the best the White House could pull off (and, if you actually believe that governments should, well govern, there's plenty of stuff in the recovery package that is worthy in and of itself, whether or not it can truly be described as "stimulative.") I also believe the housing plan was more comprehensive and ambitious than most people expected, even if it does let a nation of spendthrift borrowers off the hook.
But there is no doubt about the weak link in this triad: the lack of clarity on how the Obama administration intends to deal with the problem of insolvent banks that are too big to fail has indeed "fallen short of being good." On Friday morning, stock averages fell to their lowest point in eleven years and the big banks led the way down. At the same time they are unloading bank shares, investors are also busily buying up insurance protection on bank debt. They are either afraid that "nationalization" will wipe out bondholders and shareholders, or they're nervous because they just don't know what is going to happen. Uncertainty rules Wall Street.
The Obama administration has contributed to that uncertainty by stressing in public an opposition to "nationalization" but failing to deliver any specificity on how it intends to proceed otherwise. Ironically, it's possible that the Obama brain trust may have decided explicitly to downplay the likelihood of nationalization, under the assumption that such rhetoric would spook the markets even further. That doesn't necessarily mean Obama, Larry Summers, and Tim Geithner are pawns of Wall Street. It could just be that they made a strategic decision to speak softly before making an intervention, rather than signaling their intentions and risking an even higher level of chaos. It's OK for Alan Greenspan to start talking positively about nationalization; each and every utterance by the Maestro no longer moves the markets like an electric shock. But if Bernanke or Geithner or Obama say the word, people will jump.
Whether or not such a strategy was in place is moot now. Investors are convinced some kind of intervention is inevitable. So they're dumping bank stocks, which further weakens the financial positions of the big banks and thereby virtually ensures that intervention is required. Fear of nationalization begets nationalization.
Obama and Geithner could conceivably have mitigated the damage by making clear from the outset that "nationalization" is an unnecessarily loaded term. As has now been pointed out by voices across the political and economic spectrum, the goal should be some kind of government assisted bankruptcy, restructuring, and reprivatization. The FDIC does this kind of job all the time -- although not, to be sure, on the scale required by a Citibank or a Bank of America.
Today, a month into his term, President Obama has far more political cover to justify a strong interventionist move than he did just a few weeks ago. When Alan Greenspan and the South Carolina Republican senator Lindsey Graham and Paul Krugman and yes even Tyler Cowen all support a government-mediated restructuring of ailing banks, the tactic doesn't seem quite so radical, does it?
But even as I wrote that last paragraph, the wire services reported that stocks rebounded late Friday on the news that that the White House "said it strongly believed a privately held banking system was the correct way to go, tempering investor fears about possible nationalization." CNBC also reported that "the U.S. Treasury department will provide some details on the Obama administration's bank rescue plan next week."
So here we go again. I look forward to learning more. But Treasury Secretary Geithner better have the goods this time, because the whole world will be watching, and no one will be in the mood to cut him any slack.