I desperately wish some big-shot left-wing pundit could explain to me why they are all so certain that the Obama Administration’s bank bailout plan won’t work.
Unfortunately, their attempts to explain themselves are (a) increasingly bizzare, and (b) not persuasive at all.
A classic example of the bizzare, unpersuasive criticism of Obama’s plan came recently from Arianna Huffington in her blog post entitled “The Obama Economic Team’s Flawed Cosmology: Still Believing the Universe Revolves Around the Banks.”
Huffington makes her opinion about the bank bailout perfectly clear: She thinks the bailout bill is based on false assumptions, and if Obama doesn’t alter his approach, it “can only lead to our being lost at sea for years to come.”
But why?
According to Huffington, it’s about “cosmology”:
Talking about our financial crisis with them is like beaming back to the 2nd century and discussing astronomy with Ptolemy. Just as Ptolemy was convinced we live in a geocentric universe — and made the math work to “prove” his flawed theories — Obama’s senior economic team is convinced we live in a bank-centric universe, and keeps offering its versions of “epicycles” and “eccentric circles” to rationalize their approach to the bailout. And because, like Ptolemy, they are really smart, they are really good at rationalizing.
It’s easy to get lost debating the complexity of each new iteration of each new bailout, but the devil here is not in the details — but in the obsolete cosmology.
If you believe the universe is revolving around the earth — when, in fact, it isn’t — all the good intentions in the world, and all the endless nights spent coming up with plans like Tim Geithner’s Public-Private Investment Program will be for naught.
Get it? When it comes to the Obama Administration’s approach to rescuing our financial system, “the devil here is not in the details.” So people like me who want to hear a clear, detailed analysis of why the plan will fail are apparently out of luck — since clear, detailed analysis apparently won’t lead us to that conclusion. The “really smart” economists advising Obama are “really good at rationalizing” and “it’s easy to get lost debating the complexity of each new iteration of each new bailout,” Arianna says — so why bother debating the individual merits of these plans, right? Instead, we should just take a giant step back and consider this idea: that Geithner’s plan to rescue our financial system is fundamentally based on the idea that the entire universe revolves around the earth.
Not literally, of course. Geithner doesn’t actually believe the universe revolves around the earth. But he believes something Arianna thinks is comparably ridiculous — what ”we live in a bank-centric universe.” Again, not literally. We can only assume that by “universe,” Arianna means the economy. So Geithner’s assumption — the laughable idea that’s comparable to believing the sun revolves around the earth — is that the U.S. economy revolves around banks.
Here is one example. Everybody agrees on the paramount importance of freeing up credit for individuals and businesses. In a bank-centric universe, the solution was a bailout plan giving hundreds of billions to banks. It failed because, instead of using the money to make loans, the banks “are keeping it in the bank because their balance sheets had gotten so bad,” as the president himself acknowledged on Jay Leno. As a result, the administration, again according to the president, had to “set up a securitized market for student loans and auto loans outside of the banking system” in order to “get credit flowing again.”
But think of all the time we wasted while the first scheme predictably failed. And how much better off we’d now be if we had provided credit directly through credit unions or small healthy community banks or, as happened during the Depression, through a new entity like the Reconstruction Finance Corporation.
Luckily, there is a plethora of economic Galileos out there who recognize that the old bank-centric cosmology is just plain wrong. But while Joseph Stiglitz, Simon Johnson, Jeffrey Sachs, Nassim Taleb, Niall Ferguson, Paul Krugman, etc. are not being imprisoned for life for their heretical views — they are also not being listened to. Which is really surprising for an administration that has prided itself on a “team of rivals” approach.
In other words, saying Geithner believes we live in a “bank-centric” economy is another way of saying that Geithner believes we’d rather have banks lending money than have the U.S. government lending money. Now, we’ve never lived in a universe that revolves around the earth — but we did live in a universe where most of the credit extended to people and businesses in America came from banks, rather than the federal government. What Geithner’s critics believe is that the universe should change from a “bank-centric” economy to a “government-centric” economy. (Imagine what we’d think of Gallileo if he suggested we should change our universe so the earth revolves around the sun – that’s crazier than anything Ptolemy ever believed.)
This is all very interesting – and quite compelling if you’re looking to exploit the current crisis in order to ram through a government takeover of the country’s banking system. But it doesn’t explain why the “bank-centric” view is fundamentally flawed. And as an economic argument, it is simply bizzare.
To the extent that Arianna makes an argument about the actual merits of Obama plan, the basic claim at the center of her argument is that this is a “solvency” crisis rather than a “liquidity crisis.” In other words, her claim is apparently that the banks aren’t lending because they are insolvent, and they will remain insolvent no matter how much money the government pours into them.
I am in no way suggesting there is anything corrupt about this or any quid pro quo involved. It’s just that in a bank-centric universe, funneling no-strings-attached money to too-big-to-fail banks is the logical thing to do.
So is arguing that the banking crisis is just a liquidity problem rather than an insolvency one, as Geithner continues to do (and if the stress tests come back declaring Citi solvent, it will be high time to start stress testing the stress testers).
Get it? Citibank is “insolvent,” and won’t lend money no matter how many billions of taxpayer dollars are dumped onto its balance sheet. Of course, Geithner is conducting “stress-tests” to determine whether Arianna’s claim is correct — but the stress-test will only be valid if it confirms what Arianna somehow already knows: Citibank is insolvent.
The “details” don’t matter to Arianna. What matters is that (a) the banks are insolvent, and anybody who tells you different is lying or blinded by their obsolete cosmology, and (b) the only non-crazy solution to this problem is a solution that involves the federal government taking over the bank’s role of providing the credit that allows our economy to function. And Geithner and Obama’s other economic advisers are “blinded” by an “obsolete cosmology” because they refuse to acknowledge the truth: that the government must take over our financial system, and any solution short of that is doomed to fail.
I suppose it’s possible that Arianna is correct.
But it’s also possible that Citibank and the other banks aren’t lending because their balance sheets are prohibitively bad — and the banks’ balance sheets are bad because they contain so many of these “toxic assets” that they’re forced to value as worthless because the market is frozen. It’s possible that once these assets are removed from the banks’ balance sheets, the banks will be in a position to lend and will do so.
In other words, it may be possible to get credit flowing again without a government takeover of the financial system.
I know that Arianna and Paul Krugman and a whole host of other left-wing pundits think I’m crazy-like-Ptolemy for thinking the sentence above is right.
But why? I’m not afraid of getting lost in the complexity. I’m not afraid of the details. I want to know. Why won’t Geithner’s bank plan work?
There’s a reason why “Joseph Stiglitz, Simon Johnson, Jeffrey Sachs, Nassim Taleb, Niall Ferguson, Paul Krugman, etc.” aren’t being listened to. That’s because their argument relies more on grand notions of “cosmology” than on clear arguments based on facts and analysis.
If these people want to be listened to more closely, they need to stop insisting that Obama is wrong and start explaining why he is wrong. Otherwise, they will remain trees that fall in the forest but don’t make a sound in the White House.