Geithner's Bank Plan: Bringing Eric Cantor Closer to Paul Krugman
House Minority Whip Eric Cantor (R-VA) has just released his official reaction to the Treasury Department's new toxic-asset-purchasing plan. And in an illustration of the GOP's sudden populist shift, Cantor attacked the proposal as a giveaway to big business:
As described, the plan seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer. In its current form, Secretary Geithner's plan is a shell game that hides the true cost of the program from the taxpayers that will be asked to pay for it. Six months after Congress debated the first TARP, it is inexcusable that taxpayers still have not been told their true exposure.
Disturbingly enough, Cantor's criticism of the Treasury plan echoes that of Paul Krugman, who wrote this morning:
The only way to argue that the subsidy is small is to claim that there's very little chance that assets purchased under the scheme will lose as much as 15 percent of their purchase price. Given what's happened over the past 2 years, is that a reasonable assertion?
Now, Cantor's party has yet to emerge with any coherent alternative to the Obama administration's plan -- and the GOP certainly isn't embracing anything like Krugman's pitch for greater government involvement in winding down truly insolvent banks. But when a leading conservative politician and a leading progressive economist are sending the same signals, it's safe to say that the day has taken a turn for the Carroll-esque.
Late Update: A GOP source emails to note that House Republicans did offer a plan of their own to right the markets. In September, Cantor proposed an insurance fund that would charge banks a premium in exchange for guaranteeing toxic mortgage-backed securities.
I'm certainly aware of that concept, but would argue that it's far from a viable alternative to Geithner's current tack. Time economics columnist Justin Fox explained at the time that insuring toxic assets would have the same risk of inadvertent subsidy that Cantor decried today, because setting premium levels for the banks would still require setting (likely inflated) prices for the securities being insured.
The Times also cited Cantor as admitting that the GOP plan "could only work in conjunction with a direct purchase of troubled debt by the Treasury" -- a situation in which government would be playing the same role that Geithner envisions the private sector at least partially playing. So my reference to the lack of a "coherent alternative" included the mortgage-backed-securities insurance idea.
Josh
Matt
Eric
And Cantor's alternative is...?
March 23, 2009 2:57 PM | Reply | Permalink
Good point.
It's not as if Cantor is going to be in favor of what Obama is proposing, no matter what Obama is proposing, so it's hardly an ominous trend that Cantor and Krugman are, at this moment, on the same page.
March 23, 2009 4:19 PM | Reply | Permalink
This whole issue is Carroll-esque. We've got progressives arguing for the government to allow the market to take its course and businesses desparately arguing for government intervention because the market is "broken."
March 23, 2009 3:00 PM | Reply | Permalink
It's good that Krugman, Sirota et al, unlike Cantor, actually do have an alternate plan. But the problem is that they're so unwilling to accept anything except their personal, preferred plan that they've become the Democrats' own little "party of no". The reason you can't tell any difference between what they're saying and what Eric Cantor is saying is because they are in fact fighting for the same thing-- do nothing. Making the case for their own plan didn't work, so now they've given up and are just focusing on attacking, tearing down, obstructing anything and everything else.
March 23, 2009 3:12 PM | Reply | Permalink
Spot on!
March 23, 2009 3:31 PM | Reply | Permalink
Politics makes strange bedfellows. Progressives and Republicans sitting in a tree...
March 23, 2009 3:24 PM | Reply | Permalink
It may well be that the GOP wins the message every day but loses the message war—which they have been consistently doing since about last June. Because to win the war they need either a strategy or for the Dems to demonstrably fail. And at this point the entire strategy of the GOP seems to be "win message today" at the expense of any longer term goal.
March 23, 2009 6:17 PM | Reply | Permalink
Of course the Repugs are gonna have these kind of stances now. The strategy is to criticize whatever the President does and offer no solutions. Cantor is a joke but that has nothing to do with Krugman who makes alot of sense these days. I give him kudos and I have already contacted the WhiteHouse to let them know I am upset with the cash for trash plan.
March 23, 2009 3:35 PM | Reply | Permalink
When you are arguing the same points as an idiot like Cantor, it surely is time to stop, pause and ask what the hell happened here? I think the left just got a wake-up call that they are sitting on the opposite side of where they think they are. Reality check.
March 23, 2009 3:38 PM | Reply | Permalink
Co-sign. I like dissent and discussion but not when the criticism becomes GOP talking points. Some need to go read Al Giordano, Booman and Nate. They've been criticizing progressives who are getting played by the right.
March 23, 2009 3:48 PM | Reply | Permalink
And if this plan fails,and the Administration continues to be tone-deaf toward populist anger on the left, don't say you weren't warned that there will be a huge and very dangerous space opened for right-wing populism. Cantor has just given you fair notice.
By the way, how well did the lockstep don't-criticize-the-Leader mentality serve the country the past 8 years?
March 23, 2009 3:53 PM | Reply | Permalink
So if that doesn't work, then you try another idea. Trial and error. That's what FDR did.
March 23, 2009 4:05 PM | Reply | Permalink
Because after failing with this attempt you'll get SO much Congressional (and public) support for ponying up the huge amount of money any other plan will require. Right. (The whole point of this dodge is to funnel money to the banks without needing Congressional approval, as some Adminisration leakers have already admitted.)
Why not just ask the unicorns to solve the problem with magic dust? That's about as realistic as your scenario.
March 23, 2009 4:09 PM | Reply | Permalink
Nationalization is the last resort.
March 23, 2009 4:28 PM | Reply | Permalink
I think nationalization would be a good idea, actually. It would have the benefit of purging incompetent management and wiping out current ownership. These folks have failed, and are thus unqualified to manage these huge companies.
But nationalization would also be hugely expensive. The US would instantly own the entire mess. It will cost us a lot either way.
March 23, 2009 4:52 PM | Reply | Permalink
I'm no economist and really have no idea what will work. But I see two big problems with nationalization
1. Do we have enough competent people in government to run institutions the size of BofA and Citibank. Im sceptical about that when we can't even staff the Department of Treasury.
2. Second, the stated goal of any nationalization plan is to turn the banks around and then sell them a few years later when they are viable. It worked for Sweden in the 90s. But the Swedish banks were relatively small compared to the banks now and there were plenty of viable banks and investors around to buy when the stability was achieved. Is there any institution big enough to buy BofA or Citibank in a few years? None come to mind since all banks throughout the world have been hit hard and are unlikely to be able to purchase multibillion dollar assets in even a few years.
March 23, 2009 5:05 PM | Reply | Permalink
There are problems no matter what you do
Regarding (1), the gov wouldn't be involved in directly running the bank. The pool of unemployed bankers and financial people is great. You're still facing the issue that no bank should be "too big to fail". In the end the top 4 banks will have to be split up.
March 23, 2009 5:39 PM | Reply | Permalink
Regarding (2),
Nordbanken had about 20% of the banking market in Sweden. You could have had Citibank for $10 billions just a few weeks ago. Citibank will have to be split into smaller parts and sold separately.
March 23, 2009 5:42 PM | Reply | Permalink
But at that point, people won't have a choice.
Saying "were fed up" trying to solve this is like a doctor saying he's "sick of" trying to stop the patient from bleeding. The US will never recover with a failing banking sector.
And the GOP isn't offering any. On the contrary, the only solution left will be nationalization, which the GOP won't bring itself to sponsor. ie. the only way they could pander is the anti-market leftist way, and they won't/can't do it.
March 23, 2009 4:47 PM | Reply | Permalink
If you like history, go back and read about Jimmy Carter's presidency. The Democrats were sure the Republicans were dead as a party after Nixon, and they gave Carter little support in the Democratic Congress or from the party. As a result the Republicans rose from the dead to elect Reagan with the help of Reagan Democrats. The problem with the Democrats is they get too self confident, and they eat their own. No matter how weak you may think Carter was, frankly I think he had a lot of progressive ideas, he certainly was better than Reagan. And no matter how much you disagree with Obama on this issue, you have to believe he is better than a Republican. Weakening Obama is playing into the Republicans hands. There is a big difference between disagreeing and assisting the Republicans in 2010. TPM and Huffington Post are crossing that line lately.
March 23, 2009 4:59 PM | Reply | Permalink
It's very true, but at the same time this right-wing populism will be ultimately hobbled by the fact that people will not be soon forgetting it was the Republicans who created this mess in the first place!
Actor A creates a problem, Actor B does not do enough to fix it. The public is outraged Actor B did not do enough to fix it. Can Actor A capitalize on this outrage? They can't possibly. The only chance to capitalize on this is to produce an Actor C who can make the argument, A created this mess, B flubbed fixing it, I'll fix it. The only credible Actor C I can think of on the right, the only group that didn't either work for obviously enable Actor A, is the Ron Paul crowd. Except even aside from whether anyone takes them seriously, their entire ideology is based around the idea that Actor A (i.e. George W. Bush) was doing the right thing in the first place! The Ron Paul crowd looks at Bush's deregulation, no-oversight policies and concludes not that these policies failed, but that Bush failed because he didn't follow these policies heavily enough. People would have to get very desperate before they start taking backward thinking like that seriously.
March 23, 2009 6:14 PM | Reply | Permalink
Just the fact that you are repeating Arianna Huffington's opinions would make me pause and consider.
March 23, 2009 4:00 PM | Reply | Permalink
Shorter Krugman: The plan will increase the amounts people are willing to pay for these assets.
Isn't that the general idea? The market for these assets is broken precisely because no one will touch them for less than a VERY STEEP discount - well less than their rational value based on the actual risk of default.
March 23, 2009 4:12 PM | Reply | Permalink
http://www.eschatonblog.com/2009/03/overthinking.html
March 23, 2009 4:17 PM | Reply | Permalink
The big question is: are the critics arguing against the plan based on 1) verifiable evidence 2) rational arguments and 3) clear criteria for success?
For instance, is your criteria for success that our financial system recovers? Or is punishing bad banks more of your goal?
And we're throwing around discussion of a Sweden model. But that's one instance. Are there any more data than just "it worked for Sweden" (which is a single case, and bears little resemblance to the scale and complexity of the American situation).
Emotional language ("despair" "mess") and demagoguery ('this will benefit those scoundrels!') don't convince. I think the bar for both the admin and critics is clear and transparent argumentation. Opinions are worthless. You need to plea your case with facts and reasons.
March 23, 2009 4:17 PM | Reply | Permalink
Which YOU might be able to do after you've actually read something about the matter. If you don't want to believe Krugman because he's an academic, try Simon Johnson who in his IMF days was personally involved in unwinding similar messes in other countries.
March 23, 2009 4:21 PM | Reply | Permalink
Does the IMF have a good track record here? That would be news to me, and many others, especialyl all those people who blame them for imposing disastrous "austerity" measures on weakened economies.
Like I said, everyone has an opinion, but we need some evidence and arguments. Get back to me if you find some. Name dropping is just another logical fallacy -- appeal to authority (http://en.wikipedia.org/wiki/List_of_fallacies).
March 23, 2009 4:29 PM | Reply | Permalink
Sure Wall Street loves this: It's just the latest and most sensational chapter in art of privatizing profits while socializing losses at taxpayer expense. Who doesn't like high stakes gambling - with other people's money? I know I would.
And why are we doing this again? Oh yea, because there are so many sound and experienced gamblers on Wall Street - and only they know the true value of the 'toxic assets' they foolishly created and already drastically overestimated, which is how we got in this mess in the first place.
This is getting to be like the movie "Groundhog Day." Except that we keep doing exactly the same thing, hoping for a different result. There's a difference between economic experimentation and fiscal insanity.
March 23, 2009 5:59 PM | Reply | Permalink
"Sure Wall Street loves this: It's just the latest and most sensational chapter in art of privatizing profits while socializing losses at taxpayer expense. Who doesn't like high stakes gambling - with other people's money? I know I would."
There's a 50/50 equity share. If the private investors get a $1, Treasury gets a dollar.
As far as socializing losses, don't blame the plan, blame the fact that all our biggest banks are all insolvent, and if they fail, so do we. The Great Depression was a credit crisis and bank failures led to total economic collapse.
March 23, 2009 6:16 PM | Reply | Permalink
There is hardly an economist around who thinks this is good plan. That's the evidence. Stiglitz, Dean Baker, Krugman, Galbraith, Simon Johnson, etc, all see this as a barely hidden subsidy/bailout of the banks. The shareholders don't suffer any pain, the bondholders don't suffer any pain, but the taxpayer, who never had any skin in the game, is being forced to backstop the risk on 93cents of every dollar of assets that are being purchased under this facility. The insolvent bank stocks soared today--that's a tangible measure of exactly what the market thinks: the chump taxpayer will indeed rescue us!
There is SUBSTANTIVELY no difference between this plan and the originally Paulson plan to force taxpayers to overpay for bank assets. If that offends people on this page, well no one is more dissapointed in Obama than those of us who worked for him as well and find ourselves horrified, but horrified, at the continuation of Wall Street driven bail-outs to the tune of trillions of dollars.
What's really offensive about this plan as well is its political cowardice: it doesn't stand up and say what it is, but hides behind the complexity of a 'public-private' partnership that's anything but. Furthermore, it continues the fiction that 'market' based solutions are the only ones worth pursuing (even while the 'market' it creates is a thoroughly fallacious one, backstopped by the public purse) and thereby appears to justify the continuing reliance of exactly those who got us here.
That there are Republicans who are going to take advantage of the proper populist rage at this should suprise no one. They will. And the Democrats will find themselves the party of the bank bail-outs, sitting there trying to explain away the vast corruption of our financial system. And they'll sound no different than those on this page trying to scream over the discourse: what's your alternative? Why do you sound like a Republican?
March 23, 2009 6:05 PM | Reply | Permalink
Contrary to the claim this is a giveaway to the banks, there is the risk that the banks won't want to sell these toxic assets at the price that people want to buy them at. This provides the ability to auction off their trash and accept the subsidized market price but doesn't force them to. IT will be interesting what and if the banks will want to sell, since selling at firesale prices certainly means markdowns and revealing their bad books.
http://www.fool.com/investing/dividends-income/2009/03/23/pros-and-cons-of-the-new-bank-plan.aspx?source=ihpsitth0000001
If this is such a giveaway to banks, why is there a strong risk that it might not work because of the pain it will inflict on them?
I'm tired of the damned if you do/damned if you don't nonsense. The markets sink and it's Obama's fault for not having a good plan. The markets soar, and it's those greedy wallstreeters making money off of us! (Never mind that my mother and yours all have their 401Ks in the market!)
March 23, 2009 6:26 PM | Reply | Permalink
So let's see if I get this. Under the Republicans in the last administration, wealth moved from the middle class to the wealthy by way of tax cuts and crony capitalism (war profiteering) and now under the Democrats, wealth is moving from the middle class to bail out the rich bankers and Wall Street. Is that how it works? Wow. The middle class is screwed either way.
March 23, 2009 8:32 PM | Reply | Permalink
what does the taxpayer get out of this. how much more money is going to be thrown at toxic assets. TARP 1 as deemed by Henry Paulson was to take over the toxic assets, the bill was signed and than Paulson changed the plan to bailout of banks not toxic assets. do we as taxpayers have an assurance from geitner and Obama that they will not change the deal once again. let's face it trillion of dollars that was supposed to be covered by the first 750 billion. what is going to be next week, 2 trillion, 3 trillion, 4 trillion or how many trillion more. ENOUGH already. Obama why do 't you spend your money first, the millions left from your illegal campaign donations. why do not you and all the other political wackos in Washington DC work for $1.00 a year. You have demanded the executives in the companies that the taxpayers bailout to work for $1.00 why not you. why are not you Obama, Dodd and McCain paying back the money that you demand AIG payback. these were political contributions. Lead by example. You say you respect the Constitution of the Us, but you are not. It seems that Washington is ruled by one word Hypocrisy. It is only good for the other guys, because I am a politician I am exempt. In Michigan we have the ability to sign petitions to have a a recall election of our elected officials at the state level for even federally elected officials. It seems that people of Michigan will be able to have a say about the tom foolery of those in Washington that have failed to read the bills that have passed without anyone really knowing all that they detailed. geitner a guy whom failed to pay his taxes. can you trust this guy.
March 23, 2009 10:13 PM | Reply | Permalink