Joseph Stiglitz on the bank bailout, from Bloomberg:
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
Stiglitz is only one of the world's best economists; when he talks, you really *should* listen.
President Obama, on why the new financial bailout/rescue plan doesn't temporarily "nationalize" the banks (as Sweden successfully did in its 1990s financial crisis):
"Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core -- core investment needs of this country.
And so, what we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and ultimately that's going to be the key to getting credit flowing again."
Well, we voted for change, didn't we, so let's start changing the culture that says we can't even temporarily nationalize the largest banks with the worst balance-sheet issues, in an emergency that threatens the world economy and is in part attributable to these banks' irresponsibility. Say, as many, including lefties like the former IMF chief economist Ken Rogoff, and lefty financial-history prof Niall Ferguson seem to believe, a belief perhaps even reflected in the stock market's fall on Geithner's press conference, we need to temporarily nationalize the banks. Call it restructuring, make the call that the zombie banks are effectively bankrupt and an expedited, not court-supervised, receivership is needed, call it tough love, pander to our "culture" of responsibility. Nationalization is a stupid word to use---it suggests an intention for long-term transfer of banking to the government, and few are seriously suggesting that. We can do bank restructuring and still "retain a strong sense of that private capital fulfilling the core investment needs of this country." Maybe it can be done, in a stealthier way, through Geithner's plan---but it's apparently not clear to most what Geithner's "plan" will turn out to be, in practice.
Carmen Reinhardt (Economics, U MD) and Kenneth Rogoff (Economics, Harvard), on the WSJ editorial page:
"For far too long, official estimates of the likely trajectory of U.S. growth have been absurdly rosy and always behind the curve, leading to a distinctly underpowered response, particularly in terms of forcing the necessary restructuring of the financial system. Instead, authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership, and only then recapitalizing and reprivatizing them."
But what would the former chief economist of the IMF know about such things?
Niall Ferguson seems to agree with Paul Krugman and the Axis of Smart on nationalizing, er, sorry, recapitalizing the banks:
"First, banks that are de facto insolvent need to be restructured – a word that is preferable to the old-fashioned “nationalisation”. Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalisation after losses have meaningfully been written down. Bondholders may have to accept either a debt-for-equity swap or a 20 per cent “haircut” (a reduction in the value of their bonds) – a disappointment, no doubt, but nothing compared with the losses when Lehman went under."
He even cites the Swedish case as a sensible model while, of course, noting the need to avoid "the nightmare of a state-dominated financial sector". I don't think Larry Summers will let that come to pass... let's just hope the soon-to-be-announced overhaul of the rescue package for financial institutions involves an effective temporary takeover, if perhaps in some form of ---voting, please--- preferred equity stake by the government, rather than the perhaps more efficient outright purchase of the big banks on the open market.
Now, where does Ferguson think the money for this takeover and recapitalization will come from, if not government borrowing? Substituting government debt for private may indeed stimulate demand, through the wealth effect and lower debt servicing costs, especially because the government can borrow at bargain-basement rates right now, so even if the--somewhat, but only somewhat, mythical---rational taxpaying consumer is factoring in the need for higher taxes in the future to pay this off, it's a net gain. Of course, if the rational taxpaying consumer is a Keynesian and believes output will be closer to potential because of this stimulus, the anticipation of the higher lifetime income stream that will generate is still more impetus to spend---an argument that applies to government-expenditure-based stimulus, too.
Forcing renegotiation of mortgages, and the making of new mortgages, at lower rates is another interesting idea of Ferguson's; noises from the Obama administration suggest they may have something in mind along these lines---and with the noise about helping out homebuyers coming from Republicans in Congress, maybe there could even be bipartisan support. (Naah, they'll back off on principle.)
But what about the rest of Ferguson's piece:
"...the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt.
The US could end up running a deficit of more than 10 per cent of gross domestic product this year (adding the cost of the stimulus package to the Congressional Budget Office’s optimistic 8.3 per cent forecast). Today’s born-again Keynesians seem to have forgotten that their prescription of a deficit-financed fiscal stimulus stood the best chance of working in a more or less closed economy. But this is a globalised world, where unco-ordinated profligacy by national governments is more likely to generate bond market and currency market volatility than a return to growth."
Well, the last bit sounds more like an argument for the US providing leadership in co-ordinated, global fiscal stimulus policy than for giving up on stimulus. (It's also the argument for buy-domestic provisions in stimulus plans, though that's definitely a second-best option to co-ordinated, unrestricted stimulus, and perhpas somewhat silly in that much of what a stimulus package will get spent on will be nontraded goods in any case---although some good public transportation infrastructure would be highly welcome, and might well involve a lot of European-made equipment.)
It's hard to think of a better time than now, with the lowest borrowing rates in years available to the US Treasury, to make some serious public investments. So Ferguson's ideas on the financial sector and mortgage loans seem reasonable, and may well provide fiscal stimulus themselves, but his argument against government expenditure for additional stimulus seems weak. Co-ordinated profligacy with your restructuring, anyone?