Robert Kuttner Releases Purported Memos Between the President and Raum Emanuel
The lead story in today's Huffington Post, is a post by Robert Kuttner White House Confidential, in which he releases to memos, supposedly exchanged between President Obama and Rahm Emanuel regarding the failure of the Adminsitrations policie's dealing with the banking crisis. Taken together they are a damning critique of a policy that threatens to simultaneously sink the economy further and weaken the political clout of the Adminstration. A few excerpts give the flavor, but they are short and should be read in their entirety.
I'm concerned that I'm getting only one viewpoint on how to solve the banking crisis, from Larry and Tim. A kind of echo-chamber effect sets in where they talk mainly to Wall Street and to each other, and different views are not heard. Larry is a very effective gatekeeper.
They both seem convinced that bailing out outfits like AIG and Citigroup, using even more money both from Treasury and the Fed, is the only way to go. And nobody inside the administration is really challenging them on the economics.
The problem is that neither the financial markets nor public opinion is buying it. My recovery package can't work if the banks keep dragging down the economy, and time is not on our side. We're burning through money that will be very difficult to get Congress to replenish if we blow it this time.
I share your concerns both on the optics and on the substance of the plan not working. Basically there are three views of how to proceed with the banks. One is the Tim/Larry approach: Lend money to hedge funds and private equity speculators to get purchases of securities from banks flowing again, so that bank lending resumes. The problem is that this does not sop up existing toxic bonds. The Street seems to have no confidence in it. And, appearance-wise, it looks like rewarding the bad guys.
The second approach is the good bank/bad bank strategy, where the bad assets are taken off the books of the banks, and they can resume operations again with clean balance sheets. The problem is that the taxpayer pays, it costs more money than we have, and the same bad actors keep running the banks. Alan Blinder makes the case for this approach, in Sunday's Times, about as well as anyone. But he didn't convince me.
The third approach is "conservatorship" or "receivership" (let's keep avoiding the N-word) where a government agency--probably an expanded FDIC--takes temporary charge of the big banks (the top four hold more than half of all the deposits). That way, the government cleans up the balance sheets, existing management goes, and we can break them up into manageable parts where no bank is too big to fail. The taxpayer shares the loss with the bondholders. Bank stockholders lose, but they've already lost upwards of 95 percent of the value of the shares.
Paul Krugman has his sharpest critique of the Adminstration failure to deal with the financial crisis in his latest Op Ed, in the New York Times, Behind the Curve, in which he writes:
There are now three big questions about economic policy. First, does the administration realize that it isn’t doing enough? Second, is it prepared to do more? Third, will Congress go along with stronger policies?
On the first two questions, I found Mr. Obama’s latest interview with The Times anything but reassuring. Our belief and expectation is that we will get all the pillars in place for recovery this year,” the president declared — a belief and expectation that isn’t backed by any data or model I’m aware of. To be sure, leaders are supposed to sound calm and in control. But in the face of the dismal data, this remark sounded out of touch.
And there was no hint in the interview of readiness to do more.
A real fix for the troubles of the banking system might help make up for the inadequate size of the stimulus plan, so it was good to hear that Mr. Obama spends at least an hour each day with his economic advisors, “talking through how we are approaching the financial markets.” But he went on to dismiss calls for decisive action as coming from “blogs” (actually, they’re coming from many other places, including at least one president of a Federal Reserve bank), and suggested that critics want to “nationalize all the banks” (something nobody is proposing).
As I read it, this dismissal — together with the continuing failure to announce any broad plans for bank restructuring — means that the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery ... well, you get the picture.
For a more in-depth analysis by Krugman's plus some useful link you can find his latest blog entry here.