Some insight into a way of thinking?
The President said this in an interview with ABC. On one level it is quite sensible; on reflection it is also somewhat disturbing:
There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade.” They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.
Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country. And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.
We have a number of thoughts about this, but we’ll save most of them for the moment. What we want to draw your attention to now is the rather academic way of thinking that seems to be in play in this vignette. We imagine a powerpoint presentation showing a continuum of policy options between the two models that Obama referred to; pros and cons of each option are listed and they are debated (endlessly?) among the economic and political advisers. Probably we are wrong about all this, but this scenario has the comforting aspect that it helps explain the inexplicable delay in announcing and implementing a rescue plan — which should have been done weeks ago to address this most critical of all issues. The most worrisome thing of all is that no plan has yet been detailed, and it is way past time for that to have happened.
BTW, we have the outline of a plan that could make sense given the urgency of this situation (the economy cannot be fixed, whatever the stimulus plan, without the banking system being fixed first): (a) Treasury buys zero or low dividend preferred stock in whatever amounts necessary to convince the market that the large banks are going to be kept viable; (b) Government gets two directors, of the Jack Welch, Bob Crandall, or Paul Volcker type; (c) Mandatory mark-to-market is suspended for, say, three years, but banks getting government investment have to amortize the difference between book value and current market price of toxic assets over that period; (d) Salaries are at market rates, but bonuses for top executives, as determined by the board’s compensation committee chaired by a government director, are deferred until the preferred stock investment has been paid back or refinanced; (e) Obama reaffirms the Paulson policy that no systemically important financial institution will be allowed to fail.
In any event, we’re prepared to look favorably on any non-zany plan that the administration comes up with. The delay-ridden decision making procedure of the Obama administration makes us very worried, however.