Monday, March 23, 2009

Give the Ball to Paul Volcker

This will be a lengthy post, so just ignore it if you want. Robert Kuttner, in a piece on the Huffington Post does a lengthy critique of the new Treasury plan for the banks, after which he gives his alternative, which is below:

The problem, of course, is larger than Geithner. The entire Obama economic team is far too close to Wall Street and far too much a continuation of the Paulson approach. And though Geithner is primed to take the fall, the plan is the work of senior economic strategist Larry Summers as much as it is Geithner's.

The grave political and economic risk is that Obama continues to let Summers and Geithner lead him down the garden path; the industry-oriented mortgage rescue saves too few homeowners; housing remains in the doldrums and mortgage securities with it; the hedge funds and private equity companies make some money with government guarantees, but the banking system remains comatose; and Republicans increasingly become the instruments of public anger.

For the moment, the president is a prisoner of this thinking and these appointees. If this were merely The West Wing, it would be the stuff of terrific drama. But alas, it's reality; and we all will live with the consequences.

In a different possible scenario, however, Obama lets the financial and political marketplace test the Geithner plan for another week or two. Then, when its failure is palpable, Obama announces a dramatically different approach, either with or without a different treasury secretary.
If this movie were Bull Durham, the most plausible veteran that Obama could bring in to play Crash Davis to Geithner's Ebby Calvin LaLoosh would be Paul Volcker. The former Fed chairman is no fan of the Paulson-Geithner approach.

If Obama handed Volcker the ball, as some kind of senior counsel, they could drastically change the game plan without even having to fire Geithner. This would be the smoothest and least awkward way of changing course. Obama could simply say that we tried variants on the Paulson formula and it didn't work. Now it's time to try something else.

The alternative course, which is winning converts across the political spectrum, is a variant on the Reconstruction Finance Corporation of the Roosevelt era. With an R.F.C. temporarily taking over the insolvent banks, you wouldn't have to bribe hedge funds and private equity companies to speculate on toxic securities. Government would take over zombie banks and use government auditors to determine just how much new money was required to bring a vastly simplified financial system back to life. Shadow banks, loan securitization, and convoluted high-risk schemes would loom smaller, not larger. The process would have far greater simplicity and transparency. And it would be far more likely to get the banking system working again, more quickly and at less public expense.

Barack Obama is a president of great promise, reassurance, and political skill. In the next few weeks, we will learn how he performs in a crisis that is being worsened by his own appointees.

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