Paul Krugman blasts the Obama administration for its startlingly slow and stubborn response to the banking crisis.
And he’s right: Announcing bold change and actually implementing it are two different things. And so far, with respect to the banks, Obama, Bernanke, and Geithner haven’t done squat.
What they have proposed doing, meanwhile, is based on an incorrect assessment of the problem.
We are not having a “liquidity” crisis in which assets are temporarily worth less than they will be soon. We are having a solvency crisis: Our mountain of debt is finally collapsing on top of us, and most financial assets are getting crushed.
The answer is almost certainly “pre-privatization”: temporary seizure and restructuring of Citi, et al. Instead of discussing this option, however, the administration clings to its early assessment of the situation and pretends that seizure means government-controlled banks in perpetuity. And then it floats yet another plan designed to try to overpay for crap assets and secretly recapitalize the banks at taxpayer expense.
[A]mong people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern. Keep reading >
And it’s a wimpy holding pattern: The Administration leaks a trial balloon to the Wall Street Journal, and then it is ripped to shreds by the blogosphere, which immediately see it for what it is: An attempt to repackage the same bad idea in a disguise that will fool everyone.
We suspect the problem is Geithner, who formed his views on the crisis by listening to Wall Street CEOs in the fall. Wall Street was wrong about “liquidity” vs “solvency,” but persuading the government that we were just undergoing a temporary dislocation of prices was (and is) critical to its survival.
We’re astonished that Ben Bernanke seems to have persuaded himself of this. But we suspect that, if Geithner finally changes his tune, Bernanke might fall in line.