I find it encouraging that the Obama team is working on a much bigger fiscal stimulus than previously contemplated. I agree with Larry Summers on this: the dangers of being too timid are far greater than the risks of doing too much. A plan of at least $500 billion is warranted, as I argued here and here [subscription required]. But the composition of the stimulus is important, obviously. Boldness in mobilising the resources needs to be matched with restraint in two respects: avoid an industrial policy that draws the government into micro-managing the recovery; and avoid structural commitments that jeopardise long-term fiscal control. A focus on unemployment assistance and infrastructure spending (the first is cyclical, the second is by its nature temporary) seems to make best sense in both respects.
The Citibank rescue is much less encouraging--though I am willing to believe it was necessary. The trouble is that it raises as many questions as it answers. Comprehensive as it may be, the deal does not in fact ring-fence all of Citi's possible future losses, only some of them. Roughly $300 billion of mainly housing-related assets are covered, but those are not the only assets in jeopardy. So that is one question: will Citi need to come back to the Treasury a third time? Another is whether this plan scales--since other big banks may shortly be asking for similar treatment. Citi has been granted pretty generous terms, after all. Can the Treasury roll this deal out to every systemically significant firm? It is hoping, no doubt, that it won't have to, but this would not be the first time its hopes have been dashed. The US government's fiscal capacity is enormous--but not unlimited.
As for Obama's main economic appointments, I think Tim Geithner and Larry Summers are both outstanding--though I do wonder whether they will be able to work well together in the roles they have been given.
President-elect Barack Obama, in choosing Timothy Geithner and Lawrence Summers to lead his economic team, is betting on a student-and-mentor pair who forged a partnership while battling the world's last serious financial crisis.
That is how the Wall Street Journal put it. I very much hope that this is not what Obama has in mind. The Treasury secretary as "student"?
Is Geithner going to be in charge of economic policy or not? To have credibility as Treasury secretary he will have to be, and the markets ought to be left in no doubt about it. (Students of British economic policy might think back to the resignation of Nigel Lawson as chancellor of the exchequer in protest at being second-guessed by Alan Walters, Margaret Thatcher's personal economic adviser. You could plausibly argue that this falling out marked the beginning of the end for Thatcherism.)
The prospect of this inverted, or at any rate ambiguous, economic partnership has also given rise to speculation about Ben Bernanke's future as Fed chairman. Is that job being lined up for Summers, people are wondering? Not helpful. All in all, I think it would have been better to give Summers the Treasury job, even if that would have ruffled some feathers. Aside from the presumption of seniority, he is the outstanding economic-policy brain in the new administration--and in the country, for that matter. It's not as though Geithner's talents were going to waste at the New York Fed. His role there has been critical.
I don't see how a jobs package that is going to "stimulate" the economy with new construction jobs rebuilding the infrastructure is going to have much of a long term impact on the fact that the U.S. financial system has collapsed.
Wall Street and Wall Street's penchant for quarterly earnings and short term profit are what truly has caused this collapse. It has nothing to do with jobs, and little to do with deadbeat home owners.
Over the course of the last 4 decades the capital markets have taken on a role that they were never meant to be. Back in the olden days when America actually produced goods and companies that sold those goods at a profit succeeded. When the company wanted to raise money they went to a bank and got a loan. Then, somewhere along the way they started selling shares to raise money instead. The public company was born...this was going to be great. Great. Everything would be transparent, it would foster better management and decisions. And it worked for a while until going public became an end in itself. Companies didn't go public to raise cash for improvements or expansion, they went public to raise cash, period. And this is how Wall Street and share price came to destroy American manifacturing and now, finally, ultimately the American financial system itself.
Of course no one will admit this and we won't see the company going back to the days when companies were privately held and debt was arranged between the company and the bank. We're going to try and put a failed system on some kind of life support for a while longer. But, without significant changes to the way valuation works, nothing will change, we will only be waiting for the next big financial boondoggle.
The only question really is when and if the world will wake up to the fact that the U.S. Treasury is so in debt that its now working in monopoly money. But, since admitting this truth would create a global catastrophe, my bet is, we keep the dead body of Wall Street alive a bit longer.
Clive,
One concern about infrastructure spending: will infrastructure jobs be restricted to American citizens and legal residents? If not, much of the spending on wages will end up being remitted to Mexico and points south, and the stimulative multiplier effect of infrastructure spending here will be limited.