Originally posted at TNR.com
© New Republic
The administration's media rollout of the Geithner Plan was as meticulously coordinated as a Super Bowl Sunday. In future courses for doctors of spin, there will be a special session on the administration's dogged attempt to get everyone together and work every segment of its increasingly fragmented viewership. Calls were even made to economic bloggers to "give Tim a chance."
But economics is a much tougher business than football. A big market jump on Monday is not victory, and you don't get to go home after breaking the record for collective charisma points earned in a 24-hour period. Instead, you start to face the difficult and more technical questions (which don't always fit the format of Sunday talk shows). Is there really a master plan? Something consistent with the administration's principles could look like this:
- Announce the toxic assets purchase plan.
- In the new budget, obtain the money needed for recapitalizing banks-so that once banks sell bad assets and recognize losses, they can get new capital from the government.
- Announce stress tests (i.e., evaluations of what banks' balance sheets will look like if the economy remains in trouble) that are tough on banks-this will force them to raise capital and sell assets, otherwise they will sit on the stuff for years.
- Use the budget money to recapitalize banks as needed using preference shares. This is a way to put in taxpayer money while preventing the government from taking majority ownership (and the administration feels strongly about this; I've asked).
- Make sure to get the toxic assets off banks' balance sheets at the new, low, reasonable prices.
So far, the administration has stopped at point 1. Unless there is a somewhat miraculous end of the credit crunch, this is almost certainly not enough. That's why the Geithner plan feels more like political maneuvering ahead of the G-20 summit next week and a way to maintain the impression of progress rather than a real, long-term plan.
There is nothing wrong with hoping that the Geithner plan works, of course. But for me to believe that we're approaching anything close to a solution, I'd need to see the administration be tough on banks-the stress tests in point 3 above are crucial-and Monday's announcement was instead very nice to bankers.
Simon Johnson is a senior fellow at the Peterson Institute for International Economics and a professor at MIT.