Obama 90

'The Big Dither

By Paul Krugman

March 05, 2009

"New York Times" --

Last month, in his big speech to Congress, President Obama argued for bold steps to fix America's dysfunctional banks. "While the cost of action will be great," he declared, "I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade."Many analysts agree. But among 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.Here's how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as "toxic waste," are really worth much more than anyone is actually willing to pay for them - and that if these assets were properly priced, all our troubles would go away.Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the "basic inherent economic value" of troubled assets and the "artificially depressed value" that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they're worth much, much more.And the government's job, he declared, is to "provide the financing to help get those markets working," pushing the price of toxic waste up to where it ought to be.What's more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions. Earlier this week, Ben Bernanke, the Federal Reserve chairman, was asked about the problem of "zombies" - financial institutions that are effectively bankrupt but are being kept alive by government aid. "I don't know of any large zombie institutions in the U.S. financial system," he declared, and went on to specifically deny that A.I.G. - A.I.G.! - is a zombie.This is the same A.I.G. that, unable to honor its promises to pay off other financial institutions when bonds default, has already received $150 billion in aid and just got a commitment for $30 billion more.The truth is that the Bernanke-Geithner plan - the plan the administration keeps floating, in slightly different versions - isn't going to fly.'

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