The Hiccup

The big story of the day is the Washington Post's rendering of Timothy Geithner's last-second switch on the bank plan, away from a "bad bank" aggregating worthless assets:

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday. Lawmakers, investors and analysts expressed dismay over the lack of specifics. Markets tanked, and fresh doubts arose about the hand now steering the country's financial policy.

They should have delayed the rollout, then. It might have caused some churn in the markets, but so did a poorly-explained, light-on-details half-measure. Geithner lost the trust of the markets by failing to explain his plan fully. Considering that the biggest thing the Obama Administration has to offer right now is confidence, that's devastating.

The other issue is what K-Drum describes:

Say what? After nearly two years of crisis and weeks of work, they suddenly discovered that buying up toxic assets from banks was problematic because the assets were expensive, hard to value, and risky for taxpayers? That's not exactly rocket science. Hell, someone who had only casually browsed through the blogosphere over the past year would know that. And not even the financial blogosphere. Just ordinary lay blogs like this one.

I really don't know what to think of this. Maybe the Post has it wrong. (Though their account matches others I've read.) Maybe the problems were actually more subtle than the Post lets on. But it sure sounds as if the Treasury team spent months discovering little more than that the world is round. WTF?

I think that's the problem of a self-sustaining closed loop. They believed their own bullshit, in short, until they couldn't anymore and had to fact reality. In addition, the Treasury Department has a critical lack of staff at the moment, making it easier for Geithner and Larry Summers to have control of the policy without dissenting voices or really any other voices. Josh Marshall explains why this is.

From what we can tell, one of the big issues is that it's actually hard to find people with the requisite knowledge of banks and the capital markets who aren't also compromised -- either in policy or business terms -- by the housing bubble and the rest of the financial collapse. And that raises again as a question: why have none of the people who were financial orthodoxy dissidents and saw what was coming been brought in to the administration. I know I'm hardly the first one to bring this up. And we know that the big appointees -- Summers and Geithner -- were part of the mix. But there aren't even any of them further down into the appointment structure. They're all still on the outside.

There's a groupthink problem here that Obama needs to address. The economy is meltng down in record proportions and we can't afford to rest the recovery on the backs of basically two people. As Krugman says, Geithner and Summers are smart but they need to get out more. They also might do by having some more friends.