I haven't written anything yet about the proposal that Treasury Secretary Tim Geithner delivered yesterday because it's very hard to find someone who actually understands it, both because it is vague and because the probems and their solutions are equally complex. (Work your way through the fact sheet [PDF].) Paul Krugman -- who I'll try to interview later today -- observed that "it’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation." But the new administration's effort does not meet expectations: By now, we should have more decisive and bold approaches from the government. The lack of a coherent long-term plan increases uncertainty, which adds to the paralysis of the financial system.
In any case, while we wait for more expert opinion, a few things of note: The plan doesn't rule out nationalization, much like the original Troubled Asssets Relief Program, it has a lot of flexibility. But one key part of the program are the bank "stress tests," a careful audit of balance sheets to determine exactly which banks are in trouble, which are not, and what needs to be done to solve their problems. (Economist Rob Shapiro recommended this confidence-boosting mechanism to me back in October.) This mechanism is also a precursor step to nationalization -- if the banks are insolvent, the government can use its shares to seize control. Geithner's plans to leverage private capital with limited public funds have the potential to increase bang-for-buck and create a more effective pricing mechanism for bad assets. Other parts of his proposal to mitigate foreclosures and increase the amount of credit guaranteed by the government seem like good proposals but remain vague.
Politically, the administration has already laid the groundwork to let Geither own this project if it fails. I am sympathetic to the treasury secretary: Geithner has probably the toughest problem-set of any Cabinet appointee, no one understands what he is proposing -- including him, almost everyone will hate what he eventually does do with this proposal, it probably won't work, and if that happens, he'll be fired.
For other views, here's what Bob Reich thinks Geithner should do. Matt Yglesias analyzes President Barack Obama's take on nationalization. And apparently some banks are getting leery of the restrictions the government is placing on the bailout funds.
-- Tim Fernholz
