I am going to one of the stupidest things that a progressive blogger can do. I am going to assert that both Paul Krugman and Atrios (in his column approvingly quoting Krugman) are missing the point.
Atrios in particular has long been ranting righteously about how the "troubled assets" of our nation's (and other nations') financial institutions, which he terms "Big Shitpile," are not "undervalued," but rather are "low-value": this is the key to the "it's not a liquidity problem, it's a solvency problem" argument. He and Krugman seem to be right about that. And they're right that all of Geithner's plans (and those of other government officials) seem to be variations on "get the public to pick up the tab."
Where they go wrong, I think, is in thinking that Geither doesn't know or recognize that these assets are toxic. I think that Geithner knows -- although he can't admit it -- and still believes that the public picking up the tab is the best option, by virtue of its being the only viable option.
Warning: this diary will be grim and violent in a Pulp Fiction sort of way. It's all in the service of presenting a vivid analogy. Squeamish readers may want to bail out early.
Atrios quotes the salient portion of Krugman's column thusly:
Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.
Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.
Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as "toxic waste," are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.
The first two paragraphs are correct; the third doesn't follow. We need not assume that Geithner believes that the public's paying off these private debts is a good alternative. It may simply be the best alternative. I will try to explain this with what I call the "Parable of the Unlucky Mafia Don."
Let's say that you are the head of a criminal syndicate in a large city -- and aren't you lucky even to have a job in this economy? You are the person in charge of all of the vices: your pushers sell drugs to talk show hosts, your prostitutes diaper Senators for their pleasure, you arrange crooked deals for contractors to build showers that will electrocute troops, etc. And then there's gambling: the biggest bookie of them all, Aigsworth the Bookie, works for you.
Aigsworth is a bookie's bookie. I mean that literally as well as figuratively: when other bookies go too far out to one side with their bets, they place side bets with Aigsworth (for a reasonable fee) to ensure that they will still come out on top (thanks to the vig) whichever way a contest comes out. You don't deal with Aigsworth directly; he is supervised and monitored, to the best of your knowledge, by one of your capos, a shadowy figure known as "W".
One day, your top lieutenant, "Nine-and-a-Half Finger Emanuel" (sometimes known as "The Dancer"), comes to you looking uncharacteristically ashen. "W" is dead by his own hand; his family all the way down to the second cousins is gone, believed to have decamped to Texas. The Dancer tells you that "W" left a note pinned to his expensive bespoke suit, apologizing and saying that he hadn't realized what Aigsworth was doing.
What do you do? You round up some of your top wiseguys -- The Dancer, Timmy the Elf, Boorish Larry, The Old Volk, Austin the Gool -- and you go visit Aigsworth, having first stopped by to pick up all of the members of his immediate family. What follows is neither appropriate for or endorsed by this diary, but at the end of the carnage the only one left alive (though wishing he weren't) is Aigsworth, who has told you a terrible story.
It seems that Aigsworth has been doing a lot more business than you realized. Aigsworth, who was certified the Most Honorable Bookie eight years running by Popular Bookmaking magazine, has taken more bets than you would have thought possible, and -- amazingly through a series of circumstances you can barely comprehend -- has lost over $100 Billion, including money lost to your individually less powerful but still pretty damn powerful competitors in your city and elsewhere all over the world.
You've done pretty good for yourself, but you don't got $100 billion.
Beating the crooked bookie's family to death in front of his eyes (and thus sending a message to future potential screw-ups) may have given you and your twisted crew some emotional satisfaction, but it didn't really do anything to solve the problem. You still need a plan. Aigsworth, who in my story (versus real life) is chastened, has to be part of the plan.
You tell Aigsworth that he's not long for the world, but that if he cooperates he can make it an easy death rather than a long, drawn-out, maximally painful one. You re-install him in his shop, where the grumbling people to whom he owes money can see him working. Timmy the Elf is going to work there with him and explain to the world what is going on. He announces that "W" had not provided the oversight that should have been present (that part is true), that there is a liquidity problem due to unforeseen circumstances, but that people shouldn't worry, because the operation is solvent. OK, that should stop the panic.
You and The Elf sit down with The Dancer and Boorish Larry and the others and try to come up with a plan. This is worse, Old Volk says, than when Nicholas Leeson, nicknamed The Rogue Trader, bankrupted the old Barings Syndicate with his screwing around in Singapore. (Note: click the link; the story of Leeson is true and worth knowing.) But the bottom line is this: there's no alternative to paying people off. It may not have to be the whole amount; this is a time where every bad thing a bettor (sometimes known in the trade as a "counterparty") has done needs to be flung back in their face to get them to accept pennies (or maybe dimes) on the dollar as just payment. But there's no alternative to paying; a Mafia family can't just declare bankruptcy.
"But where we gonna get that kind of money?", asks The Gool.
Boorish Larry, of course, is the one to give voice to the answer everyone knows is true: "From suckers."
And thus do the shakedowns begin. They aren't going to knock over a bank or anything -- who tries to get money out of a bank these days? -- but efforts to suck the wealth out of everyone in town, to a degree they may notice but find barely tolerable, commence.
So, in a thousand different ways, you start cadging money out of people, through new protection fees here, through promising them services on credit that you don't intend to provide (and can individually intimidate them into giving up should they ever try to collect), etc. The public knows that something bad has happpened, even if they don't know what; you may be able to use their desire to be on the right side of you to intimidate them into acquiescing. Everyone, guilty and innocent alike, is going to be taking a haircut here, you included, and the haircuts administered to the most prominent and most guilty will be the most public, to keep the masses of suckers entertained and believing that justice is done. But they too will pay -- until the situation can return back to normal, Aigsworth (to whom it looks like you're giving the money, even if it all goes to pay off his bettors) dies a quick and painless death if he's nice, and confidence is restored. So ends the parable.
The lesson to be learned here is that Timmy the Elf Geithner is (if this speculation is correct) not an idiot who can't see that these assets are toxic; he just knows that, to at least some extent, they still have to be paid off if our nation and its economy are going to retain anything like their previous position on the world stage. He also believes -- possibly correctly -- that most of that money is going to have to come from American taxpayers. There are all sorts of different ways to dress that up, dice it, sautee it, and smother it in a dark gooey sauce, but eventually -- in his view -- the public is going to have to eat it.
This may be, in fact, part of why Obama's budget and other recent social proposals are so good. Perhaps they are the spoonfuls of sugar to help the medicine go down. If the economy survives, we can have the health care and the green economy and the abatement of war that we want. So, if you want the good stuff, you had better swallow the medicine, says he.
There is a debate to be had about burden sharing, and there is good reason to believe that (as usual) the rich are benefitting far too much having paid far too little. That's a fair debate to have, but it may be a protracted one. We have many years to try to recoup from the wealthy, especially as information comes out later, down the line, when it will not cause the panic it might cause if released today. So as we prepare our notes for that debate, we should also recognize that Tim Geithner is probably not a fool. He is probably simply trying various ways to get the broad American public -- which, as bank robber Willie Sutton said of banks when asked why he targeted them, is "where the money is" -- to accept an odious deal of public payoffs of AIG's gambling debts and more.
If we push hard enough, we can probably get him to tell the truth: that he's doing it this way because there is no alternative. Are we better off if he makes that admission? Probably: we're better off, at least, if he convinces us that the wealthy and the guilty are taking a comparable haircut and will face more to come in the years ahead. I'd be willing to incur more public and the like if it is truly necessary to prevent economic disaster, and more willing if I thought it would lead to positive social restructuring.
So maybe we are in a moment of shadowplay. Atrios and Krugman are wrong about Geithner being a fool, but until he admits that he is acting out of necessity because of what "W" (the real one) and others have done -- and surely he does not escape blame -- then taking his assertions at face value may be the best course. We should squeeze every ounce of candor from Geithner than we can, recognizing that there may be good reasons why it can't be complete. But I think that Atrios's and Krugman's work would be improved if they speculated that perhaps Geithner is neither a fool nor a knave, but rather someone who believes that to a greater extent than desirable the public will, unfairly, have . to pay off counterparties to AIG. Even if we beat the crooked bookie's family to death, we still need to solve the problem, and only the broad public has the money to do so.
It's pretty clear at this point that that is what Geithner is trying to do and that we're not going to get the entire story yet (if at all) as to why. So let's critique this evident plan on its merits, rather than dismissing it as bumbling, and talk about, at minimum, what can be done to pay the public back for covering Wall Street's assets and asses.