As Tim Geithner prepares to introduce the newest financial bailout scheme, a sort of TARP II, let's take a quick tour of what we know about the underlying policy debate. For weeks now there's been a pretty torrid argument between the nationalizations versus "bad bank" crowd. If the reporting in The New York Times is accurate Tuesday, that debate also took place within the administration, pitting what the Times calls Obama political aides, such as David Axelrod, against Treasury's Geithner.
Part of the complexity here, of course, is that defining a "bad bank" scheme is difficult, and the plan Geithner will introduce Tuesday seems to be one of a number of hybrids, this one involving private and public investment. But generally, the plethora of plans, many of them complex, has created a lot of confusion: Last night, Josh Marshall at Talking Points Memo reacted to a CNBC report and wrote that it looked like the bad bank was out and there would be no request for more money over the $350 billion. He then recanted after reading the first Times story. (Marshall earlier had hammered CNBC for asking Nourel Roubini and Nassim Taleb for stock tips, agreeing with a commenter that CNBC somehow represented a disconnected "Wall Street media." Well, clearly Marshall doesn't spend a lot of time watching CNBC, which would ask Jehova Himself for a stock play if He showed up. And CNBC represents nothing but itself.)
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One of the ideological losers of this affair appears to be Paul Krugman, who argued for a much larger stimulus and for nationalization. Behind Krugman is a large piece of the left wing of the Democratic Party eager not only to punish the malefactors of wealth at the banks but to more directly control the banking system. Geithner, Larry Summers and, in the end, Obama himself drew back from such a deep and complex involvement, though this battle on its left wing may explain Obama's forceful move last week to cap some Wall Street compensation and Geithner will apparently hammer that theme Tuesday. As for Krugman and the nationalization wing, this game is far from over. If the bailout proves too small and the financial system doesn't refire adequately, their argument will gain strength. The problem then is that Obama's political standing, now so strong, would erode, making everything from the Democratic side of the aisle more difficult.
One area that could prove to be politically volatile: the apparent dependence on private investment to make the TARP II work. That apparently would mean private equity and hedge funds, which will stir all kinds of questions, particularly if there are windfall profits to be made from seriously depressed assets. The fact is, these assets can as easily rise as fall. If there's one hobbyhorse of the nationalization left in all these matters, it's that the banks are essentially insolvent and that the value of the toxic assets today are the values that will exist in six months. That's not necessarily the case. And when someone makes a bundle off them, as they did in the S&L crisis among others, that will be cause for further controversy. Wouldn't it be a shock if TARP II was the very vehicle that brought PE and hedge funds back from the brink? And imagine the pay packages.
Whatever happens, Geithner himself seems likely to be forever enshrined as an enemy to the nationalization rump, assuming the role Robert Rubin and Summer held under Clinton, though far more exposed and embattled. You know you're in trouble with your ostensible Democratic allies when David Brooks in the Times praises your plan.
Meanwhile, the Republican right will just wait for the plan to stumble as well. Geithner gets some credit for not nationalizing, but that won't matter if the economy continues to tank. All this makes clear that what Obama and Geithner are all about is recreating a political middle, tortuously negotiating between the hands-off, tax-cutting right and the nationalizing, punish-the-malefactors left. Both stimulus and TARP II have all the marks of compromise policies, which isn't necessarily a criticism. But we'll see if the center holds. - Robert Teitelman
Robert Teitelman is the editor in chief of The Deal.
