A Missed Opportunity

In three public appearances—town hall meetings in Indiana and Florida as well as a prime-time news conference—President Obama has achieved a rhetorical tour de force in promoting the economic recovery legislation now before Congress. His remarks have skillfully discredited the government-bashing and market fundamentalism that have dominated U.S. political discourse for the past quarter century.

One of Obama’s most effective points has been the need to turn the current crisis into an opportunity. He argues that proposed spending provisions relating, for instance, to school construction, renewable energy development, and the computerization of medical records will help both in boosting short-term economic activity and in providing the basis for longer-term improvements in education, energy independence and healthcare efficiency. Rarely has the case for public investment been made so passionately and so eloquently.

Would that the same could be said about the speech given by Treasury Secretary Timothy Geithner (photo) about the Administration’s plan for revamping the financial bailout. First, it felt odd for a cabinet officer to be introduced by a member of Congress—Senate Banking Committee Chairman Chris Dodd. Second, the speech was surprisingly vague on some key points, and Geithner did not take any questions.

The speech began with a recitation of the dismal features of the ongoing financial crisis, which he seemed to attribute more to loose monetary policies than to the predatory practices that saddled so many homeowners with unsustainable mortgages. Geithner spoke of failures in the regulatory system without mentioning that, until nominated for the Treasury post, he was part of that system as the head of the Federal Reserve Bank of New York. That awkward fact may explain why his criticism of the bailout policies pursued by his predecessor Henry Paulson was rather muted. “The actions your government took were absolutely essential,” Geithner insisted, “but they were inadequate.” A lot of adjectives come to mind about Paulson’s track record. “Inadequate” is hardly the most apposite.

When it came to the plan itself, Geithner seemed mainly concerned to give the appearance of dynamism, even resorting to quasi-military terminology in saying that Treasury and other agencies “will bring the full force of the United States Government to bear to strengthen our financial system.”

And what will this force seek to achieve? Geithner then switched to a medical metaphor to say that banks will be subjected to a “comprehensive stress test.” This seemed to mean a closer look at their balance sheets. But instead of suggesting any crackdown on institutions whose financial records reveal past shenanigans, Geithner suggested that those banks with more serious problems will be given access to a new “capital buffer” provided by Treasury. In other words, more bailout money for those institutions that screwed up the most.

The Treasury Secretary went on to describe a Public-Partnership Investment Fund that would “leverage private capital” to begin a process of relieving banks of the toxic assets that are now said to be the reason why credit is not flowing. Yet Geithner did not adequately explain why the financial markets would suddenly become enamored of assets that they are currently shunning.

A more straightforward portion of Geithner’s plan is the idea of injecting at least $500 billion and perhaps up to $1 trillion from the Federal Reserve to unfreeze the market for consumer and business borrowing. A big part of this market relates to credit cards, so the Administration seems to be suggesting that we try to ride out the recession by using more plastic.

Geithner left perhaps the most important feature of the plan—foreclosure assistance—for last and then said it was too soon to announce full details.

Apart from laudable provisions relating to transparency (including a new disclosure website), there is not much in the Geithner plan that represents a fundamental break from the Paulson approach to the crisis. According to the New York Times, Geithner resisted calls from other Administration officials to take a tougher approach toward the big banks. The result is a new plan that, aside from the restrictions on executive compensation, continues to coddle the large financial institutions that brought the country to its current precarious condition.

By putting its financial policy in the hands of a man who seems to have accepted the cowboy culture of Wall Street, the Obama Administration is wasting the opportunity to use the crisis to achieve fundamental change in the banking system. Instead, the new transparency measures may end up revealing that the Geithner plan is headed for the same dead end as that of his predecessor.

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