Obama and Geithner: Hoping for the Best, Or Wishful Thinking?

At management team meetings at my old company, there was a slogan I was known for: “No wishful thinking.” I would trot it out whenever I felt like our expectations for the future (say, our sales projections, or our product delivery dates) were being influenced by our desires for the future. Let’s say, for example, that you have to hit your sales target, raise more money, or lay people off. It is very easy to plan around hitting your sales target, because the other options are unpleasant. But that would clearly be folly.

I thought of this when listening to an interview Adam Posen did for Monday’s Planet Money (beginning around the 6-minute mark). The Geithner Plan had not yet been announced, but Posen already had the right diagnosis: wishful thinking. The administration, on his analysis, is hoping that it will be able to turn the economy around without having to take tough measures with the banks.

Martin Wolf puts it this way:

[H]oping for the best is what one sees in . . . the new plans for fixing the banking system. . . .

The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive.

I also thought this was particularly insightful:

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress.

It does seem like Geithner’s proposals are a kind of effort to piece together a solution given those three constraints, ultimately founded on the hope that the underlying problems are not all that serious. But I’ll stop there. Sometimes we bloggers compete to come up with marginally more interesting ways of telling the same story. For today I’ll just recommend reading all of Wolf’s post.

Comments

[ANDRE HAEFF:]

The elimination of Mark to Market could restore confidence in
Treasury Secretary Geithner and his recovery plan.

All future planning of asset valuation and risk is based on certain assumptions of future value.

What was the Empire State Building worth when it was constructed in the midst of the depression?

Was our defense budget just before World War II thought to be excessive by many?

Other examples: the value of open land is low until it is developed; the value of an idea is
low until it is implemented; the prime historical example is when the Manhattan Indians marked the value of their island to the current market of $24 worth of shiny beads back in the 17 th century.

Replacing Mark to Market by a valuation system that includes
current, past and future prices creating a sort of moving
average upon which to plan US economic surival and growth seems to me to be the solution.

I hope the Treasury Secretary Geithner will seriously consider eliminating the Mark to Market accounting rule.




Andre Haeff revised February 11, 2009

Feb 11 04:51 PM

[Butch:]

Obama doesn't have a clue about what will help the economy - nor does he want to. All he wants to do is pursue a socialist agenda. Sec. Geithner is just following the boss's orders like a good little lap dog.

Feb 11 05:39 PM

[Sameh El-Sh...:]

Dear Tim Geithner,

Here is my solution for the US economy's woes

A/ you pass a law for the government to confiscate from all banks any asset that they cannot value. You do not pay banks anything for the assets you confiscate. This law comes into effect Monday. By close of Monday, any bank that refuses gets nationalised.

B/ all these assets go into a special investment vehicle called THE BAD BANK

C/ an independent bunch of number crunchers work all week to issue on Friday what they think banks may be paid in the future, if at all, when the Bad Bank is dissolved. This act of generosity on behalf of the government is really nothing more than a ploy aimed at maintaining the pretence that the US is still a capitalist economy.

Please see 10th feb post below for details, at www.holycows.info/blog...

The Lord created the world in six days and rested on the seventh, if you listen to me, rather than congress, you can RECREATE the world in 5 days, and spend the weekend at home taking online lessons in how to pay your taxes.

Feb 11 06:59 PM

[Supeheater:]

I hope the Treasury Secretary Geithner will seriously consider eliminating the Mark to Market accounting rule.

Its not his call. The SEC has the authority over accounting standards, which it has delegated to the FASB, at least until it commits suicide or sells its soul to the IASB. I hate "mark to market:" but it isn't the source of the problem. An exacerbant, perhaps, but not the principal or primary cause.

Feb 11 08:57 PM

[prudentinve...:]

A good first step would be to candidly acknowledge that there are real losses, they are massive, they will not magically disappear, and that someone will pay for them.

The next step is to decide, then declare, who will pay for them, whether it is the banks' investors (stock and bond holders); or the workers amongst the general public, through taxes; or the savers amongst the general public, through inflation; or some combination thereof.

All attempts to pretend otherwise is wishful thinking, and the market understands this reality.

Feb 11 08:59 PM

[User64738:]

What we need is another Lincoln, no Obama and no McCain.

Feb 11 09:45 PM

[zalo:]

All this congress/obama/geithne... stuff is a political circus. A witch hunt produced to cover up the real responsibles of al this economic crash.

The first responsible is THE GOVERNMENT for failing in regulating the financial system. Isn´t the government the one who through regulation let banks to leverage up to their heads with AAA MBS? With this the government effectively delegated their responsibility on private, interested parties.

The second big responsible group are the PEOPLE who took huge, unpayable amounts of debt to buy overvalued houses. All that excess money is not in banks, that money is in hands of the previous owners of the houses or in developers. So, it is fair that the people has now to pay for their clumsy financial decisions?. Yep, they HAVE to loose their houses and they HAVE to put money to support the financial system.

Banks have also their share of fault...but they are not the only guilty ones.

But in order to win the elections, both candidates appealed to the people by blaming banks. You cannot win an election by critizicing all the people who wrongly bought a house they couldn´t afford.

Feb 11 11:04 PM

[who:]

Totally agree! The root of the current problem needs to be faced and dealt with one way or another. The root cause over leverage, living on credit, cheap money, etc. needs to not be repeated - no more low interest rates. Unfortunately, the exact opposite is being proposed and followed. Over 3 million lost their jobs and more, many are facing are on their way, will people start spending because of a tax break here and there?

What is so sad is the miss opportunity to really solve the problem, people are loosing their jobs and homes, and the outlook is bleak. Is this not the time to realize looses and put together GOOD BANKS!?

On Feb 11 08:59 PM prudentinvestor wrote:

> A good first step would be to candidly acknowledge that there are
> real losses, they are massive, they will not magically disappear,
> and that someone will pay for them.
>
> The next step is to decide, then declare, who will pay for them,
> whether it is the banks' investors (stock and bond holders); or the
> workers amongst the general public, through taxes; or the savers
> amongst the general public, through inflation; or some combination
> thereof.
>
> All attempts to pretend otherwise is wishful thinking, and the market
> understands this reality.

Feb 11 11:04 PM

[mr freddo:]

Interesting...on the Drudge Report their is a headline that says


PAPER: European banks sitting on $24 trillion of toxic assets...

But when you go to the article, there is no mention of a dollar amount.

Assuming the headline is providing valid information, it points to the crux of this financial crisis. That is, just the European banks are holding $24 trillion in toxic assets. Generally speaking, I will make a wild guess and say that US banks have similar levels of exposure, let's say $20 trillion. These losses are so staggering that they are beyond the capability of any sovereign nation to afford a rescue.

The current financial system is a walking corpse. It may very well be best to let the entire system fail and then be ready to inject capital into the new system.

Feb 12 12:03 AM