Paul Krugman is unhappy:
Feelings of despair: There’s so much to like about where Obama is going — health care, transparency in government, ending the war in Iraq. And the stimulus bill is OK, though not big enough. But on the question of fixing the banks, many of us are feeling a growing sense of despair. Obama and Geithner say the right things. But Simon Johnson nails it:
How long can you say, “we are being bold” when in fact you are not?
Obama and Geithner say things like,
If you underestimate the problem; if you do too little, too late; if you don’t move aggressively enough; if you are not open and honest in trying to assess the true cost of this; then you will face a deeper, long lasting crisis.
But what they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost. The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again. And the result will probably be a deeper, long-lasting crisis.
Back last November, I said that the Obama administration needed to do five things:
- Expansionary monetary policy at an appropriate scale.
- Expansionary fiscal policy at an appropriate scale.
- Massive bank recapitalization--or nationalization--so that banks believe that they can be banks that start lending again rather than being zombies that think they have to hunker down and minimize risk in order to keep the next negative shock from destroying the institution.
- Massive buy-ups of mortgages by Fannie and Freddie so that (a) mortgage deals could be reworked, and (b) the supply of risky assets on financial markets that the private sector could be reduced in consonance with the banking system's reduced risk tolerance.
- Design the regulatory system for financial markets going forward.
Bernanke has done (1). Summers and company have done (2) at perhaps half-scale--but thanks to the Republicans and Senator Nelson that was the biggest fiscal boost progrtam that could get through congress. Geithner and his skeleton staff are doing about half of (3)--or perhaps less. And I see no signs of (4) or (5).
This is much, much better than the Bush administration. But it is not reassuring. We might still get out of this "OK," where "OK" means a headline unemployment rate that stays below 10%. But we might not...