How Geithner’s Plan Ended Up So Vague

After the Geithner plan landed with a thud last week, I was left wondering why the Treasury Secretary had failed so utterly to meet big expectations.  It appears that the plan Geithner presented last week was
in fact intentionally incomplete, with the selected course of action only having been decided upon only a few days prior to the announcement.  Initially, Geithner intended for a more expansive plan that involved buying up toxic assets:

Senior economic officials had several approaches in mind, according to officials involved in the discussions. One would be to create an “aggregator bank,” or bad bank, that would take government capital and use it to buy up the risky assets on banks’ books. Another approach would be to offer banks a government guarantee against extreme losses on their assets, an approach already used to bolster Citigroup and Bank of America.

However, Geithner and co. realized late in the game that this sort of government intervention would be too costly for the taxpayer, and perhaps that political will for putting trillions of dollars of taxpayer money at stake simply was not there.  The issue of how to properly value these toxic assets was also still a major concern which the Administration could not seem to get around.

This led Geithner to shift course in the first week of February to a new plan, the basic contours of which we are now familiar with:

By Wednesday, Feb. 4, Geithner was leaning toward a different approach that his former colleagues at the Federal Reserve had developed months earlier, the source said. This involved a joint public-private fund to buy up the assets. Private investors, likely hedge funds and private-equity funds, would put up capital, and the government would loan money to the fund. If the private investors made wise decisions about which assets they bought, they would be able to pay back the government and make money for themselves. For the policymakers, the chief appeal of the public-private partnership is that it solves the problem of how to price assets. The private money managers who provide capital for the fund would decide which assets to buy, and at what price, taking government bureaucrats out of that difficult task.  Moreover, the private contribution lowers the total amount of money the government would need to put at risk.

Ultimately, Geithner had to put forward a plan that was short on details therefore because he had just chosen this course of action only days earlier.  There was a deliberate choice to go with vague, rather than to set out details that might later be subject to change—a major criticism of how Paulson handled TARP I. As WaPo reports, “[i]n the end, Geithner and his colleagues decided that it would be better to take flak for being vague than publicly offer half-formed details that might later have to be revised.”

I think Geithner deserves kudos for intentionally choosing vague over misleading details, but I’m still concerned. This is the kind of thing that they have had months to think about, yet they were still debating the most basic elements of their approach deep into early February. This shows that this problem is complicated indeed, but also seems to indicate that not everyone on Obama’s economic team is necessarily on the same page.

But there is another problem at play here as well—insularity. Paul Krugman points out, rightfully, that Geithner & Summers need to avoid insular discussion and should consult with knowledgeable outsiders. If they had done so, perhaps they would have dealt w. these concerns earlier…considering that many top economists had thought of these very issues months ago:

In a way, that’s encouraging: we were spared Hankie Pankie II. But it’s a bit alarming that it took so long for the team to figure out the problems — and that they apparently spent a long time going down a route that led to a dead end. Many of these issues had been hashed out in public discussion last fall, when Paulson made his play. And I can’t believe that the discussions would have gone so off the rails if any of the high-visibility outsiders had been in the loop — Joe Stiglitz, Nouriel Roubini, Simon Johnson, etc. (No, I wasn’t in the loop either.)So what the WaPo report seems to suggest is a worrisome insularity. Geithner and Summers are smart guys — but they need to get out more.

Insularity can often be the kiss of death for an Administration. Let’s hope the Obama economic team starts consulting with people outside their inner sanctum, and soon.

-N.S.