On Sunday, Treasury Secretary Timothy Geithner told "Face the Nation's" Bob Schieffer that the administration was prepared to exact a heavy price for any further massive bailouts delivered to banks.
"If, in the future, banks need exceptional assistance in order to get through this, then we'll make sure that assistance comes with conditions ... Not just to protect the taxpayer but to make sure this is the kind of restructuring necessary for them to emerge stronger. And where that requires a change of management of the board, we'll do that."
Critics from the Obama administration's left flank, where distrust and rage at the White House's approach to Wall Street seems to grow exponentially by the week, were quick to dismiss Geithner's words. Robert Reich, the former Clinton administration labor secretary, offered a typical assessment:
I suppose it's comforting to know our government stands ready to fire corporate executives and directors whenever taxpayer money is on the line. But I suspect Geithner's new tough line is mostly designed to reassure a public that's lost all faith in the wisdom of bailing out Wall Street.
That could well be true -- except for the fact that Geithner was not delivering a "new tough line." The formulation is almost exactly what Geithner said during his confirmation hearing on Feb. 11, after Sen. Jon Tester, D-Mont., asked him whether the nation's biggest banks were "too big to fail."
"I don't want to use those words," said Geithner. "But as a basic principle, conditions should escalate with the level of assistance."
Of course, Geithner's rhetorical consistency over the last two months doesn't prove anything as to what practical actions the administration is prepared to take in the future. And there is little question that the revelations of Larry Summers' obscene compensation over the last two years from precisely those institutions that failed so manifestly to make sound financial decisions has raised the heat on the Obama administration. I'm sure former Treasury secretaries who have also performed stints as president of Ivy league institutions don't come cheap on the lecture circuit, but one really has to wonder about the value received by Goldman Sachs and Citigroup for such labor.
The fact remains, however, that whether one feels compelled to attack Obama-Geithner-Summers from the left or the right (and let's recall, for every broadside from the left lacerating the administration for kowtowing to Wall Street, there is corresponding and increasingly panicky attack from the right alleging that Obama's real goal is complete government control over the private sector), one thing has remained true. The administration has remained consistent and "persistent," as the chairman of MIT's economics department Ricardo J. Caballero, wrote in an opinion piece in the Washington Post:
It is true that the announcement made in early February by Treasury Secretary Timothy Geithner lacked specifics, but it was not short on principles and general guidelines. These principles recognized the systemic nature of today's crisis and the critical role that uncertainty has played in it. The announcement of the "legacy assets" program last month confirmed these principles. From this, one can get a sense of perseverance and determination, which are exactly what an economy needs during times of massive uncertainty ... If the administration's economic team can keep a steady course, and if it is persistent, we have a good chance of getting out of this mess in the near future. I am hopeful.
With that in mind, let's consider what might have been the the most important news item to break in the last couple of days -- a seemingly mundane report from the Wall Street Journal that might be far more significant, in terms of policy implications, than Larry Summers' 2008 income. The Journal reported on Monday that "Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country's 19 largest banks."
Regulators announced the tests two months ago as part of an effort to determine how much assistance big banks might need to continue lending if the economic downturn worsens. The government is wrestling with how to bolster the lenders without appearing to prop up banks that are beyond repair.
The stress test deadline is the end of April, which is just a few weeks away. How that moment is handled will be a defining test of the Obama administration.
If regulators conclude that the banks are fine and dandy, and all of them have enough capital to survive a continuing economic contraction, then How the World Works will join the ranks of those predicting a repeat of Japan's lost decade of economic stagnation. The banks are not fine, or we wouldn't even be having this discussion.
If regulators decide that one or two or half a dozen are effectively insolvent, and require additional capital, but that capital is delivered without a significant "escalation" of conditions, then the political uproar that ensues will be every bit deserved.
Of course, there's a third possibility. A big bank, say, Citigroup, for example, is found to be in dire need of additional billions, and the Obama administration goes to Congress, cites its stress test findings, and says we need X amount of money to achieve Y kind of restructuring, and oh, by the way, CEO Vikram Pandit is out the door. You thought we were tough on G.M.?
That possibility is consistent with the public statements made so far by representatives of the Obama administration. It requires us to see the administration's handling of the auto industry as a model for how it intends to manage Wall Street, and not as a contradiction ot it. Does that make it a likely possibility? No one outside the administration can say for sure. Without doubt, there are plenty of reasons to think that the stress tests have been designed to be too mild. Certainly, the revelations about Summers also chip away at the Obama administration's credibility. And I think it's also probably true that Geithner and Obama don't want to have to take such steps -- which may put them at odds with a significant portion of the American public, which is lusting, with good reason, for a pound of flesh.
The point is, this is not some far-future speculation. The denouement is fast approaching. A little more than three months into its term, the administration is going to tell us directly what it thinks about the health of the nation's biggest banks. That doesn't strike me as that tardy a pace. But I do think it is the moment that we should be sharpening our knives for. And in the meantime, maybe we should take heart that economic policy hasn't been zigzagging all over the place without rhyme or reason, as was true during the administration immediately preceding.