My view has shifted a bit on the Geithner/Obama plan. I’m gone from opposing it outright to agnosticism to tepid skeptical support – largely because of DeLong, Drum, Thoma, and Surowiecki. And since I know a lot more about telecom policy than finance, I’ll try to squeeze an analogy out of the telecom world to justify my tentative support.
But first, the plan itself. There are many reasons to be skeptical – and Hilzoy has offered up quite a few persuasive ones. But at the end of the day, I think my tepid support has essentially two foundations: (1) skepticism of government administrative abilities; and (2) political realities.
On the former, I hope my pro-government regulation street cred is well-established. Indeed, my great hope is that the Obama administration topples the Goldwater/Reagan paradigm, and ushers in a new era of ideological faith in progressive government solutions.
But that said, government just doesn’t do certain things very well. Personally, I think government market interventions work best when they are "foundational." By that, I mean that government is often good at creating the underlying conditions for successful market activity by others, but not so good at taking full-blown control of the wheel. (A good example is federal securities disclosure laws and limits on leverage – they help make markets work by facilitating trust, transparency, and stability).
Thinking to telecom policy, some of the FCC’s most successful policies have been foundational nondiscrimination requirements – e.g., Carterfone (the right to attach any phone to your phone jack, and not just AT&T’s); Computer Inquiries (protecting data transmissions – and later Internet transmissions – over the phone network from discrimination).
The FCC’s success here was in laying the right groundwork. The neutrality requirements allowed “higher layer” market activity and innovation to flourish. Indeed, these rules are credited with spurring such innovative devices as fax machines and the Internets.
The implementation of the 1996 Telecom Act is a far different story. The idea was good, but Congress basically required the FCC and state regulatory commissions to micro-manage and set various types of prices and requirements regarding network access. It’s a maze so thick that I’ll spare you the details – though you should run if anyone ever says “telric” to you. The point is that the regulatory regime was simply impossible to administer. It was too complex, and the demands on government too great.
That’s basically my fear with nationalization. The scope on which it would be required would not only cost a lot of money upfront, but would require several years of exceedingly complex oversight and administration. I’m sure the government could pull it off ok in isolated instances. But taking over a significant chunk of the nation’s banking industry is a different story. It would be administratively ambitious, to say the least.
One benefit of the Geithner plan, then, is that it leaves quite a bit of the ongoing, day-to-day administration in private hands. Yes, there’s a ginormous subsidy involved. Yes, investors need only commit a fraction of total costs. Yes, it may not work and the government would lose a lot. But still, if you compare the Geithner plan to full-scale nationalization, the private sector will handle far more of the administrative duties. And (when possible) that’s how it should be – complex, day-to-day administration is precisely the type of thing that government doesn’t do very well.
All that said, there are a million objections – and many of these are at levels I won’t pretend to understand. But I’m just not on board with nationalization yet. I’d prefer to at least try this route first.
The second part of all this is the politics. The Geithner plan has a lot of potential political benefits, relatively speaking. (Considering politics would be somewhat distasteful if nationalization was a clearly superior policy option, but I don't think it is).
First, it shifts at least some of the short-term costs onto the private sector (e.g., the debt guarantees). With health care and energy on the near-term horizon, buying some time on the deficit front is not such a bad thing.
Second, it’s more consistent with the ideological disposition of most Americans. “Nationalization” will be demogagued as socialism, or big government liberalism, or whatever. We may ultimately need to go there – indeed, maybe we should have already gone there. But a crucial assumption I’m making – one I share with Drum – is that nationalization will be easier, not harder, to sell if the Geithner plan fails.
Third, I think Wall Street will ultimately be supportive. Not so much because they're good people or great citizens, but because of the incentives created. These people really do have the potential to make a killing if the assets are undervalued. And as much as I dislike many of them, they’re a formidable political opponent.
Of course, I might change my mind again tomorrow. This whole affair has been intellectually and epistemically humbling. But for now, this is where I am.