Sunday, March 22, 2009

Democracy is... Flat?

Tom Friedman shares his insights....
If you want to guarantee that America becomes a mediocre nation, then just keep vilifying every public figure struggling to find a way out of this crisis who stumbles once - like Treasury Secretary Timothy Geithner or A.I.G.’s $1-a-year fill-in C.E.O., Ed Liddy - and you’ll ensure that no capable person enlists in government.
We could call this "meta-condescension". If I don't excuse Liddy for being condescending to me about contract rights and the importance of overcompensating people in the financial industry, I get a condescending lecture from Friedman about how unfair I was to react to the condescension.

Sure, I've had my moments of conscience about talking about the mistakes of both of these men, whose biggest sins appear to be that they are extraordinarily conventional thinkers for their respective industries, further hampered by tin ears. But that doesn't mean I'm not going to respond to a patronizing commentary about the "sanctity of contracts" from the former CEO of Allstate, or dismiss his notion that the people at AIG are doing taxpayers a great favor by unwinding contracts that should have landed the company in bankruptcy court, not made it the beneficiary of the largest taxpayer bailout in history. You know what? If the choice is between sitting silently while Liddy earns his $1, or being able to fully and fairly criticize the decisions of the CEO of AIG, I say pay him a market wage.

Geithner's department is far from fully staffed, and he's taken on a tough job - in normal times, probably only 1% of Americans even know who the Treasury Secretary is, and probably not many more than that know that we have one. As I said yesterday,
I'm still willing to assume that Geithner is a dedicated, hard-working public servant who means well, and who believes in this approach to the problem. But if he can't or won't explain himself, he deserves no deference.
We also shouldn't overlook the fact that public servants, first and foremost, are supposed to serve the public, and the public has the right to question them when their priorities appear to be the advancement of private commercial interests. Frank Rich captures the apparent attitude of the officials who are supposed to be addressing our concerns:
Bob Schieffer of CBS asked [Larry] Summers the simple question that has haunted the American public since the bailouts began last fall: “Do you know, Dr. Summers, what the banks have done with all of this money that has been funneled to them through these bailouts?” What followed was a monologue of evasion that, translated into English, amounted to: Not really, but you little folk needn’t worry about it.
Contrary to Friedman, I'm not content to be treated like a toddler just because Geithner is paid about $200K/year. I want to know what's in the bitter pill I'm being asked to swallow, and why other remedies aren't better.
You will ensure that every bank that has taken public money will try to get rid of it as fast it can, so as not to come under scrutiny, even though that would weaken their balance sheets and make them less able to lend money.
Oh no.... You mean, private banks that don't need government money wouldn't take it, and market forces would dictate their ultimate success or failure? What a horrible possibility! And again, you say, the solution is for us to "shut up and take it"? That seems like the least we can do....
And you will ensure that we’ll never get out of this banking crisis, because the solution depends on getting private money funds to team up with the government to buy up toxic assets - and fund managers are growing terrified of any collaboration with government.
Arguably the solution involves nationalizing the troubled banks, including those of the "big four" that can't make it on their own, cleaning up their balance sheets, and restoring them as quickly as possible to public ownership with new shareholders and new management.

Friedman has apparently embraced Geithner's solution - the government provides the money for private companies to buy up toxic debt, providing enough of a subsidy that they're willing to pay the valuation given to them by the banks that hold them, while "sharing" profit and protecting the private buyers from taking losses. It assumes that the assets at issue aren't grossly overvalued by the banks, or that the real estate bubble will quickly reinflate, or... well, we can't really be sure, because Tim Geithner won't tell us his assumptions. And Friedman implies, "We have no business asking; shut up and take it."

What's funny is, Friedman can't even follow his own advice:
Right now we have an absence of inspirational leadership. From business we hear about institutions too big to fail - no matter how reckless. From bankers we hear about contracts too sacred to break - no matter how inappropriate. And from our immature elected officials we hear about how it was all “the other guy’s fault.” I’ve never talked to more people in one week who told me, “You know, I listen to the news, and I get really depressed.”
The first words, put into the mouths of "business", could as easily be assigned to Geithner (or Ben Bernanke), who plainly believes that certain banks and financial institutions are "too big to fail". The "banker" could easily be AIG CEO Liddy, whose deference to compensation contracts goes way beyond what I can recall ever hearing from an employer, let alone from an insurance executive. And to attack public officials as immature and self-serving? As someone, oh yes, Thomas Friedman put it, "If you want to guarantee that America becomes a mediocre nation, then just keep vilifying every public figure struggling to find a way out of this crisis who stumbles once".

Yesterday, addressing bankers, Ben Bernanke commented,
Many of you likely are frustrated, and rightfully so, by the impact that the financial crisis and economic downturn has had on your banks, as well as on the reputation of bankers more generally. You may well have built your reputations and institutions through responsible lending and community-focused operations, but nonetheless, you now find yourselves facing higher deposit insurance assessments and increasing public skepticism about the behavior of bankers - outcomes that you perceive were largely caused by the actions of larger financial institutions. Many of you managed your businesses prudently and shunned more exotic instruments and activities. And many of your customers--households and businesses - avoided excesses and are able to meet their financial commitments on a timely basis.

No doubt this frustration has been heightened by the problems caused by financial firms that are too big or too interconnected to fail. Indeed, the too-big-to-fail issue has emerged as an enormous problem, both for policymakers and for financial institutions generally. Creditors of a firm perceived as too big to fail have less incentive to monitor and restrict the firm's risk-taking through adjustments to the price at which they lend money to the firm. If left unaddressed, this weakening of market discipline creates an unlevel playing field for smaller institutions, which may not be able to raise funds as cheaply, even if their individual risk profiles are better, or at least no worse, than those of their larger competitors. The erosion in market discipline distorts market behavior and can give firms an incentive to grow - either internally or through acquisitions - in order to be perceived as too big to fail.

Government rescues to prevent the failure of major financial institutions also have required large amounts of public resources. These actions have involved extremely unpleasant and difficult choices, but given the interconnected nature of our financial system and the potentially devastating effects on confidence, financial markets, and the broader economy that would likely arise from the disorderly failure of a major financial firm in the current environment, I do not think we have had a realistic alternative to preventing such failures.
Yet where Geithner and Bernanke appear content to (possibly) create a solution for these institutions to apply "next time", I think "There's no time like the present". I would be creating a Chapter 10 bankruptcy for companies like Chrysler and GM that are "too big to fail", and putting the weakest of those companies through it as a "test case". I would do the same thing with the "too big to fail" financial institutions. Why not? As Bernanke says,
Finally, an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.
There's no time like the present.

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