Jason LInkins Doesn't Like the Fact That Jackie Calmes Doesn't Like Neil Barofsky's "Bailout"
Second Quarter GDP Growth Looks Like 1.5%/Year; Third Quarter GDP Growth Looks Like 2.0%/Year

In Which I Give Up Refereeing the War Over the Treasury: Matthew Yglesias on Neil Barofsky vs Tim Geithner


Neil Barofsky vs Tim Geithner: Who's right on the bailouts?: [B]eneath the obvious mutual loathing between Barofsky and Tim Geithner, and the dueling teams of journalists around each man, is a relatively narrow disagreement about public policy. Unfortunately the nature of the dispute between the two teams' media proxies—see, e.g., Jackie Calmes for Team Tim and Gretchen Morgenson for Team Neil, both in the New York Times—tends to obscure what the actual disagreement is about….

[T]he Treasury Department… they've been… trying to create the kind of healthy well-capitalized banking system that's crucial… [and] trying to create the kind of well-regulated banking system that's less likely to blow up in the future.

What does Barofsky think they're doing?… He agrees, for example, that Team Tim is in fact trying to better-regulate the banking system and that it's being fought in this effort by the Republican Party…. [D]oes Barofsky also agree that Team Tim is trying to create the healthy and well-capitalized banking system that's crucial for broader growth? Well only sort of:

In almost every critical juncture when it came to really meaningful choices in conducting the bailout, this administration and the prior administration—there's no meaningful difference  between the two—consistently chose the interests of Wall Street banks over that of homeowners, over that of the broader economy….

Team Tim would say that they're trying to create a well-capitalized banking system in order to bolster the broader economy. Team Neil counters that the broader economy would be better-served by a policy that imposed steep losses on banks and instead repaired household balance sheets…. [W]ho's right?…

Team Neil has never really presented a coherent alternative course of action…. From the original winter 2008-2009 argument over bank nationalization along Swedish lines, I've rarely heard it acknowledged that these courses of actions would likely have required hundreds of billions of dollars in additional "bailout" money. I think that still would have been the optimal policy, but it's not a no-brainer….

I can also say that I don't actually think this disagreement was nearly as consequential as either side seems to think. The administration made a catastrophic blunder in failing to appoint and confirm a team of Federal Reserve governors who were committed to reflating the economy to something approaching its pre-crisis trend level of aggregate spending. Had they done that, the banking policies they chose would have worked. Having failed to do that, even alternative superior banking policies would have failed.

Well, we do not know how well more aggressive and different housing policies in particular and financial market policies in general would have worked because they were not tried. Claims that they would not have worked because only monetary policy is important--or alternative claims that only fiscal policy is important or only banking policy is important or only new-Keynesian policies are important--seem to me to be strikingly unfounded: the victory of ideology and academic-intellectual factionalism over a frank admission of the limits of our ignorance. The stakes might have been low. They might not have been low. The example of Sweden in 1992 suggests that the stakes might have been high…

There is also the question of which side, in the really existing political-economic situation of 2009-2010, Team Neil was really playing for. Yes, they wanted to strip the bankers of their wealth, put bankers in jail, and pull homeowners above water. But their was no coalition for such a super-Swedish-model solution in Congress and no possibility of creating one. And Barofsky's allies in congress--the people who he was leaking games of "gotcha" to, the likes of Darrell Issa--wanted nothing done at all.

One perspective--I cannot evaluate it--is the view of the left-bureaucratic-career-civil-servant opposition within Treasury. Their view is that the net effect of Barofsky on the Treasury's willingness to do more to boost the recovery was negative:

  1. Tim Geithner's instinct is to think that the situation is never as bad as it looks right now, that everybody needs to be at the table and needs to get something in a compromise, and that when things are confused it is best to do less and avoid making mistakes.
  2. This makes him an absolute trainwreck as a #2 to somebody like Obama, whose instinct is also to think that the situation is never as bad as it looks right now, that everybody needs to be at the table and needs to get something in a compromise, and that when things are confused it is best to do less and avoid making mistakes.
  3. There were many proposals within Treasury to do bold and aggressive things that might or might not have worked to rebalance the financial sector and boost the economy.
  4. But somebody would always say: "this might not work at all".
  5. And somebody else would say: "and there is one chance in ten Wall Street would find a way to seriously game us on this, and then we would spend the rest of our lives defending ourselves against Barofsky in court."
  6. And somebody else would say: "And what kind of picture do you think Issa will paint when Barofsky leaks whatever looks worst? The White House will not like that at all."

Back in 2009 I thought I had a good understanding of Geithner and his team and what they thought and what they were trying to do and why. Now, however, I don't claim to. So I can't referee this any further.