Thursday, February 26, 2009

Feelings of Despair

Bad Policy has Bad Consequences, even for the good guys.

The Obama Administration's inability to withdraw from Iraq and its unwillingness to apply the guillotine to the banking crisis do not portend well. There's no good alternative to Obama and the Democrats in the foreseeable future. If they fail, the alternative being prepared on the Right is a populist Fascism. So, when I see Obama embracing half-measures and dilly-dallying, I do feel some despair.

Adam Posen, via Paul Krugman:
"The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.

These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble’s burst in 1992 through to 1998 …"

Mark Kleiman channels an Anonymous Expert: "Because repairing the banking system is far and away the nation's most important policy need, I regard the Obama administration as an utter failure to date. Geithner looks every bit as clueless as Paulson, and seems determined to match Paulson in badly investing taxpayer capital."

Paul Krugman:
"on the question of fixing the banks, many of us are feeling a growing sense of despair.

Obama and Geithner say the right things. But Simon Johnson nails it:

How long can you say, “we are being bold” when in fact you are not?

Obama and Geithner say things like,

If you underestimate the problem; if you do too little, too late; if you don’t move aggressively enough; if you are not open and honest in trying to assess the true cost of this; then you will face a deeper, long lasting crisis.

But what they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost. The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again.

And the result will probably be a deeper, long-lasting crisis."

The hope, if there is one, is that, unlike Bush and Paulson, Obama and Geithner can be reached by these criticisms. People with real power in Congress will listen and pressure will mount to change course, as things get worse. At best, we hope that there is some limit to how deep they will dig. But, right now, the policy as proposed, is to dig and dig and dig.

Digging always leaves you in a hole.

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