A Spoonful of Sugar and TARP Part 2

Tom Bozzo

Reader Roger Senserrich listened to the Obama reply that also caught CR’s eye and sends a relatively favorable (to the administration) interpretation:

Let´s see if it makes sense.

1. Obama says that America doesn´t nationalize; it is not something we do. That´s actually false; ask IndyMac or WaMu shareholders on what hit them. The FDIC does nationalize.
2. The political system, however, does not perceive it as the “N” word. There was little backlash against those actions, as the FDIC is seen as non-political; some sort of a technocratic guardian that does what is needed.
3. Enter the stress test: Geithner talks about testing the banks to see if they can swim in these troubled waters. Only some banks; the 14 with assets over 100 billion, will take this wonderful “test”. Depending on how well they fare, they will get more or less capital, and the treasury will grab more or less stock.

See where am I going? The administration could be looking for a way to benchmark and nationalize what is needed using a technocratic procedure with a clear way out, as a way of doing the work with some political cover. Essentially, the idea is to get the “N” word out of the debate, and make it about banks getting “intervined” after failing to comply with the “agency”´s regulations.

It is convoluted, and I might be looking for a rationale that is not actually there, but it makes sense; it gives them a way to do what is needed without actually having to name it. Nationalization might be economically necessary, but is not politically feasible; this could be a way to create political cover for it.

Tom here. For another sympathetic view, see Jeff Frankel. I read Obama’s statement through the filter that Obama is a smart lawyer and note that he’s foreclosed nothing going forward; the money quote in my view is that what we’ve seen so far represents “some of the tough love that’s going to be necessary.”

Now Geithner and Summers could yet find their pictures attached to the Wikipedia entry on regulatory capture, but we also need to avoid reacting as if we’ve been overconditioned to eight years of life under Davies’ Law. This is not to counsel against vigilance with respect to the administration’s deeds so much as to suggest a la Frankel that the “they have no clue and the Obama presidency has already failed” reactions are at least premature.

The political issue is not irrelevant. Policies that don’t need to go through Congress would appear to operate under the constraint that it has to be able to be done with $350B in TARP Part II funds, the exercise of various Fed powers in coordination with Treasury, and whatever TARP Part I funds get paid back by institutions who think they can live without help from a Treasury less pliant than Paulson’s. Those resources are substantial but not unlimited. A program that requires more than that needs to deal with the likelihood of opposition from most of the Party of No’s representation plus other politicians capable of detecting that another dip into public funds for the financial services industry, however necessary, is likely to rival plague for popularity. At least as frightening as the problem that the “stress test” is window dressing is the likely size of the caucus who’d vote against an expanded bailout were the evidence of necessity delivered by the ghost of Ayn Rand herself. In fact, I’d say that right now there’s no way a bailout expansion would pass.

That seems to put a premium on cleverly engineering a plan to the aforementioned resources. That may be observationally indistinguishable from a lack of boldness.