There are three basic policy alternatives for solving the problems of our “insolvent” large banks. We can liquidate them, reorganize them using conservatorships, or provide them with Government subsidization in the hopes that the market value of their troubled assets will rise, and that liquidity and enough asset value to achieve solvency will be restored. The Obama Administration, in following the Geithner Plan, has chosen to follow the third alternative, in spite of much public advice from a growing chorus of the nation’s most prominent economists favoring the second alternative.
Given that the Administration has decided to go with the theory of its own, overly homogeneous, economic team, and given the amount and quality of dissent outside that team, I think it’s imperative that it provide transparency and accountability for its policy. In particular, I think the Administration should share with us its answer to the question of how it will monitor and evaluate whether its policy is a success or a failure. What evidence would the Administration accept in order to conclude that their policy of subsidization has failed and is based on a false theory, and that another alternative and decision model about what will work, such as the reorganization alternative should be tried? Will the Administration evaluate its policy as a failure if the big banks survive, but the people who use their credit facilities find, for example, that their interest costs on a $10,000 credit card debt rise from $600 to $1200 or even $3,000 per year? Will they consider it a failure, if the big banks concentrate the banking industry further by absorbing still more of the small banks? Will they consider it a failure if their PPIP raises the market value of toxic assets by only 20%? Will they consider it a failure if the banks are saved, but the public becomes so alienated by the flow of trillions of dollars to the Banks and their bondholders and shareholders that the Administration has no political capital left for its Health Care, Energy, and Education Programs, not to mention the additional economic stimulus package it may need in the fall?
The Administration has been relatively silent on the question of how it would know whether its subsidization policy has failed, and neither the Congress nor its critics have pressured them to answer it. Why not? Without an answer, the Administration is free to shift its success and failure criteria as we move down the subsidization road, in much the same way that the Bush Administration went down its troublesome road in Iraq, constantly shifting its justification for the War, and losing its credibility along the way. That sort of thing is not a scenario we can afford here. The Banks stand athwart our critical path toward prosperity, and they’re currently blocking that path. We can’t afford to simply have them squat there, while we lose 600,000 jobs per month from main street. We need the criteria for recognizing failure and shifting to another policy/strategy/theory right now. And, if the subsidization alternative fails, we need to move on to one of the other theories without mourning its failure, and without further delay.