Treasury Secretary Tim Geithner laid out the administration’s plan to bring the financial sector back to health in a speech this morning. I do not believe he took any questions and the markets’ immediate response was to sell-off. The obvious problem with the plan is that it carries tremendous political risk, as was acknowledged in internal administration debates.
Officials said the plan was fashioned after a spirited internal debate that pitted Mr. Geithner against some of the president’s top political hands.
Some of President Obama’s advisers had advocated tighter restrictions on aid recipients, arguing that rising joblessness, populist outrage over Wall Street bonuses and expensive perks, and the poor management of last year’s bailouts could feed a potent political reaction if the administration did not demand enough sacrifices from the companies that receive federal money.
They also worry that any reaction could make it difficult to win Congressional approval for more bank rescue money, which the administration could need in coming months.
Geithner fought back and prevailed over Obama’s experienced political hands that wanted a more populist response. Matt Yglesias correctly points out that the right way to set policy is to listen to your experts and not be driven by your political hands. Yet, this is one situation in which the political folks might a have a better grasp of what is feasible in the populist political climate that currently prevails in the country.
As a strategy to heal the financial sector, the Geithner plan may be workable, at least in theory, but it’s not a plan that this Congress is likely to endorse with their votes. The administration doesn’t need Congress’s votes on this plan at the moment, but they’ll probably need them sometime in the near future.
I am going to let others analyze the complex plans to set up a bad bank for toxic assets. I note that the Treasury Department will be doing a ‘stress-test’ to assess the vulnerability of financial institutions, and that those that are sufficiently weak will be nationalized or partially-nationalized. I think this plan will ‘work’ at least in one sense. It will eventually scoop out the toxic assets from the balance books of our lending organizations and allow them to start fresh. The big questions are: at what cost to the taxpayer, and at what cost to the Democratic Party?
