The Geithner Plan and the Krugman Backlash

New York Times columnist Paul Krugman appears to have begun his own personal depression on the news of Treasury Secretary Geithner's plan to separate threatened banks from their nonperforming ("toxic") assets. But in attacking the Obama Administration for collaborating with the banks in order to prevent their implosion, he's made one misleading statement: "...the whole point about toxic waste is that nobody knows what it’s worth." The reality is that that is true only when such assets are sitting inert in a financially threatened bank's portfolio of assets. The only way that a financial asset's value can be determined is through a market, in which potential buyers bid the price up or down. All other methods -- such as a Nobel laureate speculating about its value -- are arbitrary.

Let's think this through: The Geithner plan assumes that lots of investors will buy nonperforming mortgage-related assets if they are stripped from banks and marketed via a public fund. Why? Not only because the government is assuming a good deal of the risk, but also because the underlying mortgages represent ownership of houses that will sell to buyers who can service those mortgages at a certain price, which is not zero (remember that wage-earners, who still comprise more than 90% of employable Americans, have regular income and need housing). If you can't service any longer your mortgage of $200,000 but could service a mortgage of $150,000, and the location of the asset in a fragile bank prevents the asset from finding a new investor, then a newspaper columnist's gloomiest estimate of its market value -- say, $100,000 -- might make it seem very toxic. But we know that such an estimate of that one asset is undervalued, because a $150,000 mortgage can be serviced. Until the asset, representing the nonperforming loan, is priced in a market, its true financial value can never be ascertained. That's the whole point of Geithner's approach: Let the only reliable mechanism (in our economic system) for determining the value of anything, a viable market, do that in the case of these assets.

When the Mellon Bank was on the brink of collapse in the late 1980s, an investment house created a "bad bank" into which Mellon's nonperforming assets were placed. This restored Mellon to solvency, and it became a healthy credit-issuing institution again -- and Pittsburgh heaved a sigh of relief. The "bad bank" eventually sold all of the bad loans, and very little money was lost. The point of doing this was to enable Mellon to do what it was supposed to do: serve the community as a source of credit. The latter is what many banks today cannot readily do because of uncertainty about the weight of these "toxic" assets on the banks' viability. The complexity of the Geithner plan is a function of the sheer scale of the general financial crisis today, as well as the administration's decision to acquire the cooperation of the financial industry instead of terrifying it with the prospect of broad nationalizations and prolonged Washington decision-making about its future.

At the present moment we may not like bankers all that much, because of their past egregious risk-taking, but we are having a historic crisis of confidence in our economic system which is unfolding too quickly for the president and the Congress to invent a whole new financial system, just because a lot of us are outraged and want to punish the bankers, or because some columnists don't want the government to do anything remotely similar to what the Bush Administration might have done. Obama picked Geithner to be Treasury Secretary because he knew he had an excellent working knowledge of the present financial system. Geithner's plan is going to be implemented, because congressional approval isn't necessary. Denunciations of the plan without constructive suggestions about how to improve it will accomplish nothing except fray public confidence in Obama's decision-making. That's the objective of the Republicans and right-wing populists, reinforced by the fear-mongering of most of the broadcast media (and now further abetted by populists on the left). If this onslaught succeeds in lowering Obama's poll numbers sufficiently, the general media may then pronounce Obama a failure, and that could put at risk most everything else that this new president is trying to do.

Paul Krugman has been a trenchant critic of the unexamined love for unbridled capitalism exhibited by the Bush Administration. But whether anyone likes it or not, we still have a capitalist economy, and its abuses have put at risk our collective economic future. Until the immediate effects of those abuses are flushed out of the system, the present toxicity of our national politics offers no prudent context for considering a more fundamental restructuring of the system. Populists picketing financial traders' mansions, gyrating congressmen predicting economic armageddon, and even fervent columnists with cosmic wisdom are not necessarily the best sources of guidance for either that restructuring or the hydraulics of the flushing that's necessary. There's a cooler cat in the White House, and we should listen to and not just lecture him.

Why the media keep getting it wrong about Obama...

Comment on The Field, 3/21-/09:

On Politico today there was a good example of how the media systematically "misunderestimate" Barack Obama: http://www.politico.com/news/stories/0309/20254.html This article piles on the supposed evidence of how President Obama is allegedly overexposed, focusing on the venues of his appearances, his "branding" or his style -- while entirely missing the cumulative content of what he is communicating. One consultant was quoted as being skeptical about Obama "betting the success of his policies so heavily on the strength of his personality," as if the President was merely engaged in a series of personal performances. Just as they did throughout 2008 during the campaign, when the political press corps and their media-consultant talking heads continually criticized Obama for supposedly too-theatrical mass rallies and repetitive, boring town-hall meetings, they are paying far too much attention to the external aspects of his appearances and virtually no attention to what he is actually saying. The public doesn't merely see a presidential candidate or a president, it also listens to what's being said. On the Jay Leno show last night, Obama gave affable, concise, easily understandable but quite substantive answers to Leno's surprisingly numerous questions about the financial and economic problems facing the country. This was 20 minutes of pure, clear content, unfiltered by the disputatious egos and tendentious attitudes of White House pool reporters and political pundits, and it reached 15 million households. It was brilliant political television. We are dealing with an entirely new kind of president, for a new, far more serious time in our nation's life. The people get it. The media mavens don't.

Hillary Clinton's approach to human rights in China

When Secretary of State Hillary Clinton didn't precede or follow her recent visit in Beijing by lambasting the Chinese government for their human rights violations, she was harshly criticized by some American human rights advocates, both progressive and conservative. They overlooked her candid explanation that there were ways of assisting rights and democracy apart from a visiting dignitary denouncing the offending government. Indeed, a few days later, the State Department's annual report on human rights was sharply critical of China, which reacted by bitterly denouncing the U.S. Nevertheless the web site of one rights advocacy group focused on China harshly criticized Mrs. Clinton on its web site: “She chose what makes us animal over what makes us human. What good can come of filling our bellies at the expense of starving our spirit? Where does history tell us that our fortunes will improve by acquiescing to tyranny?” Mrs. Clinton hardly acquiesced to tyranny. This was a hyperbolic statement that probably says more about the ideological frame or emotional reaction of who it was coming from (and it wasn't that smart politically, as a way to persuade the Administration to be more vigilant about human rights).

Since the Tibet crackdown, few if any observers of China have been under any illusions about the authoritarian, repressive character of its government. A routine verbal swipe by Hillary Clinton would have done precisely nothing to make Beijing's rulers think twice about their contempt for the political rights of those they govern. But the world is in the middle of several overlapping crises: a slow-motion but still-unfolding financial panic, a serious nose-dive in production and employment in many nations, the possibly imminent acquisition of nuclear weapons by Iran (as well as the possible use of military force by Israel to forestall it), and turmoil in Pakistan. The Chinese can play a substantial, favorable role in global diplomacy on all of these four problems -- it would be in their interest. And, yes, we need them to buy plenty of Treasury securities so that our domestic, recession-fighting stimulus can be financed. These are all very serious matters. In the long term, there is nothing inconsistent with subdued official U.S. rhetoric about human rights at various moments and quietly increased U.S. assistance to democratic and rights activists around the world who are the ones whose action will really determine whether rights and democracy eventually come to countries like China. Hillary couldn't have liberated China on her first trip there, and she won't be the one who does it anyway.

The President's plan is not a "gamble"...

The British writer Godfrey Hodgson recently wrote on openDemocracy.net that there was a "reality gap" between President Obama's plans to resolve America's economic crisis and the resistance he faces, implying that the president's "rhetorical tools" might not be up to the task and that the "political obstacles" are ferocious (http://www.opendemocracy.net/article/barack-obamas-reality-gap). Another way of putting this, to use a British reference, is that Hodgson sees congressional foxes in the way of a presidential hedgehog. The ancient Greek reference -- "the fox knows many things, but the hedgehog knows one big thing" (revived for modern consideration by Sir Isaiah Berlin) -- is apt. The one big thing that Obama knows is that the American public has decisively rejected not only the specific policies of the previous failed Republican administration, but also Washington's culture of special interests and obstruction of the national interest, which have immobilized the political system for most of the last two generations. By trying to obstruct Obama's proposals, his Republican opponents are merely re-enacting the despised failed narrative. So the president has enormous political wind in his sails, which is predicated on far more than his "rhetorical tools" or the public's yearning that we get through the present economic crisis with the American way of life intact. Obama's proposals are not, as the pundits are now wrongly calling them, a big political gamble, because he realizes that unless his proposals are seen by the people as proportionate to their manifold discontent, their support will quickly wane. He is not gambling on a political opportunity. He is embracing a political necessity. The stakes are no higher for him than they are for his country. The people recognize that the president understands their demand for bold action. That is the reason that he has their respect and, most probably, their patience.

The conservative obsession with the size of government

The Atlantic's Marc Ambinder remarked about President Obama's speech last night before a joint session of Congress that it read "as a President justifying his plans to expand government." In other words, a speech about the nation's economic crisis was not really about that, it was about some kind of liberal agenda to expand government. Only an ideologically blinkered conservative would have that interpretation, because only conservatives are existentially obsessed with the size of government. They have that obsession because they have an absolutist definition of individual freedom as always engaged in a zero-sum game with government, whether or not that government is based on the consent of the people. Equally hostile to the freely elected government in Washington or authoritarian-minded rulers in Iran or Russia, American conservatives are essentially anti-democratic. So they reject any innovative usage of government even in their very own democracy. And that's why they don't comprehend Obama. He's beyond a zero-sum view of freedom-or-government, because he realizes that if the people he democratically represents want him to exercise vigorous public leadership to solve public problems, he had better do that, or else he'll simply be using his paycheck to do his own bloviating -- which is the modern Republican equivalent of governing. Leading America in 2009 is not about parsing the size of government. It's about saving the economic system that created the recent boom in the first place -- something that Republicans, amazingly, don't seem to have any ideas about -- re-establishing a system of justice based on the rule of law rather than the whim of a president, and restoring a proper humility to the use of American power elsewhere in the world, so that national security is not reliant solely on military force. Republicans have no ideas about how to do those things, either. They are flat on their political backs. And we know who is putting fresh vitality back into national leadership. It ain't Bobby Jindal.

In defense of Cass Sunstein

Cass Sunstein, a lawyer and former professor at The University of Chicago Law School, has been appointed by his friend Barack Obama to be the new director of the White House Office of Information and Regulatory Affairs, a heretofore obscure job that Sunstein, one of the nation's leading public intellectuals, will no doubt make into a think tank influencing the full regulatory sweep of the Obama Administration. In a prolific career, Sunstein has ranged far beyond the law, writing books on FDR's fostering of new economic rights, the influence digital technology is having on democracy, and the roots of radical extremism. At the American Political Science Association annual meeting in Chicago in 2007, I heard Sunstein give a brilliant talk on the dynamics of group polarization (the kind of thing sociologists would study) and its role in creating terrorists. Sunstein's mind is supple and his writing is very accessible, two traits that the new president no doubt finds appealing.

On Hullabaloo yesterday (one of the major political blogs on the left, http://digbysblog.blogspot.com/), digby tore into Sunstein after confessing that she knew little about his work. Mischaracterizing it based on comments from other bloggers, she punished him for, among other things, suggesting that regulatory control should shift to the extent possible from coercive measures to incentives, and claimed that this meant it might as well be coming from the usual free market-worshipping conservative playbook. So much for trying to ascertain where a writer or thinker is actually situated along a spectrum of views from left to right (to the extent that that spectrum is still descriptively useful). For digby, if Sunstein is willing to think about modifying traditional regulatory schemes in order to coax markets toward outcomes consistent with national policy, rather than simply order them to comply, it means he's a right-winger in disguise. Apparently she's not willing to let Obama's people explore any fresh policy alternatives if they are not branded and vetted as issuing from the playbook on the other side of the ideological spectrum, which is presumably the one that worships command economies and state dictation of commercial life.

For another view of Cass Sunstein, it's useful to consider his ideas about political extremism in the context of the search -- in which Western foreign affairs ministries and law enforcement agencies are engaged -- for new long-term policies that might help curb terrorism, inasmuch as existing policies, on which enormous sums have been spent in recent years and which have required vast deployment of military forces, don't seem to have discouraged terrorist networks from replenishing their ranks. Sunstein has written a bracing book ("Going to Extremes") on one dimension of the subject: how radical extremism is incubated. Bringing behavioral psychology and political sociology to his analysis, Sunstein offers crucial support to the fundamental progressive understanding that radical groups hijack legitimate political grievances and that unless those who have those grievances see that extreme violence is likely to hurt and not help their causes, and that there are alternative ways to fight for their rights, there will continue to be a market for that violence. Clearly, Sunstein is a thinker so much more adept than most of the so-called conservative intellectuals that his appointment signifies that Obama wants not only to govern differently, he wants to extinguish the hold of the conservative paradigm on the political class.

Admittedly, Sunstein is not a predictable, programmatically minded social democrat, so if you deplore those who believe that effective government need not be "bigger government" -- which is to say, if you agree with conservatives that the debate about government should be about its size rather than its efficacy -- you won't be able to see how useful Sunstein's work is, in the struggle to rebuild a national consensus about the importance of public action, public resources, public regulation and public well-being. No new president, merely by being elected, can suddenly announce a new political order that everyone will happily embrace. Part of creating a new order involves changing the way people think. And that requires dismantling the default beliefs of conservatives, which have become the default beliefs of the political class. Conservatives have been "drugging the public mind" (a great phrase of Lincoln's, about Southern slave-holders' defense of states' rights) for two generations now. Sunstein has been a great ally in undermining the premises of their ideas.

It's not time "to scream bloody murder"...

Many vocal progressive bloggers seem to believe that Barack Obama is revealing himself -- by his appointments and his willingness to evaluate entitlement programs -- to be a closet conservative. One commenter on a major blog today insisted that "it's time to scream bloody murder" about Obama. The tendency of progressives to do this -- indeed, the habit of doing it, so well-developed (and well-motivated) during the Bush years -- is self-marginalizing when it comes to influencing the thinking of independent and not especially partisan voters whose support gave Obama such a decisive, mandate-creating majority last November. Obama obviously intends to reinforce and expand that mandate, and he's succeeding in doing so. Government is not merely a policymaking picnic, followed by spending programs. A president can't get change out of a democracy without developing and sustaining reliable popular support that will help him or her command the heights of governing, so that the elaborate, creaky, balky functioning of government -- legislative as well as executive -- can be pushed decisively to produce change. And again, that's obviously Obama's strategy. "Screaming bloody murder" at Obama will not only be regarded as irrelevant by anyone who does not already want to hyperventilate, it will lessen and not amplify the screamers' influence on actual events. Screaming at politicians may make the screamers feel better, but it will accomplish absolutely nothing. If you want to influence Obama, ignore him -- and persuade the kind of people who voted for him that he hasn't yet embraced the kind of change they voted for.