Monday, February 23, 2009

Mixed Signals

. Monday, February 23, 2009

In times of crisis, we look for reassurance. Roosevelt told us that we have "nothing to fear but fear itself." President Obama is as yet unable to offer the calm reassurance and clear direction markets seek. As one commentator noted, "since the president last went on prime-time television, the stock market has been crumbling. The spread of the worldwide recession is part of that, of course, but the perception that the administration has not worked out what it wants to do to fix the financial crisis — and, like its predecessor, is making it up as it goes along — has played a major role."

Lest you think I am too unkind to our new president, consider these confusing statements from the administration. “The capital needs of major U.S. banking institutions will be evaluated under a more challenging economic environment,” the administration said. “Should that assessment indicate that an additional capital buffer is warranted,” it continued, the banks could be required to give the government a right to acquire common shares, with voting rights...Administration officials said the new statement stopped well short of declaring that regulators were ready to partly or wholly “nationalize” any major banks" (My italics).

If full nationalization is 100 percent government ownership, then isn't the government acquiring a 40% ownership stake with full voting rights "partly nationalizing"? Of course it is, as any sensible person knows. The administration's insistence upon doing x and calling it not x contributes mightily to the perception that the administration is making things up as it goes along.

Why is the administration struggling to develop and articulate clear policy direction? I don't know, but I can suggest three quite different hypotheses.

  1. The Median Voter: Administration policy must satisfy the median voter. The median voter did not elect Obama to give more money to big banks. The median voter believes this is something only Republicans do. As the emergent consensus seems to be that nationalization is the necessary next step, the need to appeal to the median voter forces the administration to obfuscate.
  2. Interest Groups: Administration policy must satisfy the interests of private financial institutions which want government money but not government control. I I think (though don't know for sure) that the donors are as likely to be those who manage and work there rather than those who own the banks. This could create different incentives regarding nationalization. Shareholders care about their equity; managers care about their jobs.
  3. Intra-administration Politics: having populated his economic team with multiple very large egos, the administration is saddled with conflicting policy ideas and the absence of a clear procedure to decide authoritatively among them.
Of course, it might very well be all of the above or something else entirely. Or, it might be the scariest hypothesis of all, that the administration has no idea what they are doing, and are just making things up as they go along.


Mixed Signals
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