Barack Obama for Treasury Secretary!

After Tim Geithner’s uninspired and uninspiring performance today, Barack Obama stepped up to show him how questions about nationalization should be answered:

TERRY MORAN: There are a lot of economists who look at these banks and they say all that garbage that’s in them renders them essentially insolvent. Why not just nationalize the banks?

PRESIDENT OBAMA:Well, you know, it’s interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.

Now I’m on the record as being decidedly pro-nationalization, but this is as clear and well-argued a case for not nationalizing as you could hope to get. First, Obama makes it very clear that he understands full well why nationalization is an attractive idea not just at first blush ("Why not just nationalize the banks?") but at second blush too.

Obama then makes the good point that the banking system in the US is orders of magnitude larger and more complex than the banking system in Sweden was when it was nationalized. He doesn’t even need to mention that the Swedish government is good at getting things done in the way that American governments simply aren’t. You try orchestrating something like this as seamlessly as the Swedes managed it. If the US government was in charge of "managing and overseeing" everything from trillions of dollars in bank assets to the amount that banks charge for a bounced check, there might well be all manner of unintended consequences, and indeed pro-nationalizers like myself have generally tried to come up with plans which would keep the banks operating at arm’s length from their shareholder even after they were nationalized.

Obama also talks about "traditions" and "cultures" — and he’s right, the Swedes are much more amenable, on a gut level, to state-owned banks than Americans are. That kind of thing matters more than many economists will admit. America has always prided itself on being the home of private-sector capitalism, and it doesn’t want to signal otherwise.

And so the Obama administration has put together a plan which tries to involve private capital as much as possible — something which really can’t be done if you’re nationalizing. It’s now incumbent upon Tim Geithner to articulate that plan clearly and in detail — something he inexplicably failed at today. I used to go to his press conferences when he was last at Treasury, in the late 1990s, and he was always very much on top of his brief then, so it defeats me why he would take no questions today and generally be so vague about what he intends to do.

Never has it been more important that the markets have faith in the Treasury secretary — and first impressions count for a lot. Today was a very bad start for Geithner. Obama’s doing his best to support him, but really that’s the wrong way round. Things had better start improving markedly very soon, or Geithner might not stay in his job for very long.

Incidentally, Paul Kedrosky is much less impressed by Obama’s response than I am:

All this talk of “culture”, “traditions”, and so on are an opaque way of saying that Democrats are terrified of nationalization because they worry about Republican name-calling. Further, saying that Sweden had five banks and the U.S. has thousands, so nationalization can’t happen here, is misleading. It ignores the relative GDPs of the two countries. What’s more, as measured by asset size, the problem is chiefly in the six largest U.S. banks which collectively account for the preponderance of the banking industry balance sheet. Muddying the issue by saying that we would need to nationalize “thousands of banks” isn’t helpful.

As I say, I think the point about culture and traditions is actually substantive; it’s not party-political. The number of banks in a country has almost nothing to do with its GDP; I don’t know what Kedrosky’s point is there. And Obama never said that we would need to nationalize thousands of banks. But if you nationalize some banks, then you introduce a generalized, and possibly self-fulfilling, fear that you might nationalize any bank. Pointing at smaller banks and saying "we won’t nationalize you" is a recipe for creating multiple bank failures, if there’s no other option for bailing them out. All of which points I’m sure Obama could have made much better himself, had Moran followed up rather than moving on to another topic.

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One Response to Barack Obama for Treasury Secretary!

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