Wanted: A Sympathetic Account Of Geithnerism

 |  Includes: BAC, C, GS, MS
by: Brad DeLong

Ezra Klein's appearance in The New York Review of Books reviewing Ron Suskind's Confidence Men drops the average age of NYRB contributors by a good 30 years or so.

I read it, and the only major single problem with it is:

  1. that I didn't write it, and,

  2. it does not provide any correction to Suskind's practice of, as Moe Tkacik put it, "casting Tim Geithner in the 'Invisible Invincible Shadow Master' role pioneered by Dick Cheney…"

Seriously: Klein identifies four places where the Obama administration went badly wrong:

(1) Reappointing a consensus-seeker like Ben Bernanke to the Fed Chairmanship rather than somebody who would push the limits of the sensible envelope on expansionary monetary policy should that become advisable.

(2) Slow-walking other Fed Board appointments.

(3) Failing to install a Director of the FHFA who would be willing to use the GSEs as tools of macroeconomic policy if that became advisable.

(4) Failing to set up the game for further rounds of fiscal expansion should that become advisable by saying "we ought to be doing more, and we will probably want to do more" whenever possible.

To these I would add:

(5) Failing to make the end of the fiscal expansion conditioned not on the passage of time but rather on an improvement of the state of the economy.

(6) Failing to husband and leverage up TARP authority--as Geithner just recommended that the Europeans do with the EFSF--so that the executive branch could do quantitative easing and loan guarantees on its own after its congressional power had ebbed, and

(7) The premature turn to deficit reduction before the recovery was well-established.

Now I think I understand the premature turn to deficit reduction--if you are confident that the recovery is highly likely to be a "V", then the press of other business that can be concluded before September of 2010 but not thereafter effectively mandates a swift pivot. Why you would be confident that the recovery would be likely to be a "V" remains a mystery, but granting that (7) makes sense.

But (1) through (6)? In all of them Geithner appears to have been a principal mover within the administration. What was Geithner thinking? I assure you he is not a happy camper right now. And why did Obama find him so persuasive? And what is the reason that he is the only member of the original team who is still there?

The mystery is particularly great because from my perspective, as one correspondent puts it:

The best policy and political moves a first-term president can make is to do everything within his power to maintain or create maximum gdp growth and corresponding employment growth (without immoderate core inflation). If Obama had started with that premise, he would be better off now, and--allowing for the relentless obstruction of the congressional Republicans--it's likely that the country would be better off, too. Win/win, as it is said.

One piece of the puzzle is that Geithner saw the consequences of the collapse of Lehman up close: he had signed off on the collapse of Lehman, as the junior to Paulson and Bernanke in that crisis. Having seen that, it would be very natural to have been absolutely terrified of another Lehman--and to have been willing to make reassuring the banking sector job one, and to judge all other policy moves by whether they risked breaking the confidence of the banking sector.

But the financial sector is really unhappy with how things have turned out:

Investors in Goldman Sachs (NYSE:GS) have lost more than half their money since 2007:

Goldman Sachs Group Inc The  GS US Stock Quote  Analysis  Bloomberg

Investors in Morgan Stanley (NYSE:MS) have lost more than three-quarters of their money since 2007:

Morgan Stanley  MS US Stock Quote  Analysis  Bloomberg

Investors in Citigroup (NYSE:C) have lost 93% of their money since 2007:

Citigroup Inc  C US Stock Quote  Analysis  Bloomberg

Investors in Bank of America (NYSE:BAC) have lost 85% of their money since 2007:

Bank of America Corp  BAC US Stock Quote  Analysis  Bloomberg

Investors in Bear Stearns, Lehman Brothers, and Merrill Lynch lost more than 90% if their investments as well.

These are all really unhappy campers. Talk about a bunch of people who had a really strong financial incentive for more activist and reflationary policies.

Another correspondent directs me to John Cassidy and Josh Green writing in the spring of 2010.

Those are indeed excellent. But they show a willingness to take victory laps and a confidence that the recovery was well-established in the spring of 2010 that at the time I thought was not rooted in data. And even if you think things will probably turn out fine on your own, you still have a Plan B ready for if something goes wrong.

As I understand it, Romer had a Plan B: she spent 2010 trying to rally the troops to extend and augment the Recovery Act by making its expiration conditional on marked improvement in unemployment. As I understand it, Summers had a Plan B: he spent 2010 trying to rally the troops for an infrastructure bank as a second wave of expansionary fiscal policy. But neither was able to get general buy-in.

Were Geithner and his Treasury so desperate for the recovery to be real that they refused to plan otherwise? Were they so overtaxed trying to do so many things at once that they didn't have the bandwidth to move Fed nominations or vet FHFA Acting Director appointments or, indeed, think at all in 2009 about what they needed to do to set up the pool table so that they would still have power to act if necessary in 2011?

I do wonder if Geithner might not have feared (much) that Republican obstructionism would keep him from doing what was necessary to right the economy. He might have most feared that the Democratic political apparatus would pressure him to do stupid, destructive things with FHFA, with PPIP, with TARP, and put some loony inflationists on the Federal Reserve Board.

Thus I do wonder if, once he thought the crisis had passed, he did not think it was time to throw away his power to act as fast as he could before the left began to push him to policy places he did not want to go.

But I really lack insight here.