Rahm Emanuel’s and David Axelrod’s New Dilemma

The President’s top political counselors face the following dilemma.  They want to be tough on banks because that makes sense politically and, presumably, because it fits how they – with considerable relevant experience – would like to address the deeper underlying problems in the financial system.But at least some prominent economic counselors to the President strongly disagree.  The Treasury Secretary, in particular, articulates the view that being tough on the banks and top bankers would further worsen credit markets and thus deepen/prolong the recession.  Mr Geithner wants to try other routes, and while he does not rule out imposing policies that banks would not like, it is not in his Plan A or likely a feature of his Plan B.

The President has evidently sided with Treasury, either because he decided they have superior technical competence, or because Emanuel and Axelrod themselves gave way when the experts stared them down.

The dilemma is this.

Should Emanuel and Axelrod continue to push hard for being tough on big banks, or should they throw in the towel for now and let Treasury run through its various schemes?  To oppose Tim Geithner would divide the Administration and also seem strange – after all, presumably they were closely involved in his selection.  But standing quietly by, say for two years, is not appealing if a critical part of our economic policies heads down a long blind alley.  And as a midterm election strategy this would be questionable.

The presumption in this dilemma is that Treasury officials are the experts.  But is that really the case?

As the President stressed Monday night, we face an impending financial system collapse of a kind not seen in the US in over 70 years.  The situation, both technically and politically, is akin to what – over the past 25 years – we have seen frequently in emerging markets but seldom in more developed countries (with Sweden and Japan as notable exceptions.)

The world’s leading experts on such problems are for the most part not at the US Treasury, which is staffed primarily with people who have spent their careers working  in (until now) relatively tranquil markets.  Most of the relevant crisis resolution experience is to be found at the International Monetary Fund (IMF).  The IMF is not comfortable giving advice to the Administration – the US is its largest shareholder and the Fund’s HQ is a few blocks from the White House for a reason – and IMF officials also cannot be called to testify before Congress.  But the views of leading IMF banking crisis experts are freely available – off the record.

What they say is this.  The right thing to do is reboot the financial system.  Find out immediately which banks are insolvent, using market prices.  Allow private owners to fully recapitalize, if they can.  Have the FDIC take over all banks that cannot raise enough private capital.  Try to re-privatize those banks quickly, while making sure the taxpayer has strong partcipation in the upside.  The difficulty with this approach is not, in the US or elsewhere, anything technical – it is really quite straightforward.  The problem here and everywhere else that has faced a serious financial crisis is: the power of the banking lobby.

If  the IMF experts are right and Treasury is wrong, does that help resolve the dilemma?


Originally published at the Baseline Scenario and reproduced here with the author’s permission.

8 Responses to "Rahm Emanuel’s and David Axelrod’s New Dilemma"

  1. Catfish   February 12, 2009 at 7:05 am

    It seems to me that completing the stress tests is the obvious first step. One has to understand the true financial conditions of the companies before effective corrective action can be taken. I submit that is why Geithner is leaving himself a lot of wiffle room before announcing specifics of the corrective actions.What confuses me is why we don’t already know. Under Sarbanes-Oxley, the CEOs of these comapanies were required to “fairly present the financial condition of the company”, at risk of a criminal prosecution and 25 years in prison. This also includes a thorough discussion of uncertainty and risk in the discussion and analysis sections of the financial statements.

  2. Leoncio Kaminsky   February 12, 2009 at 9:44 am

    Great Simon,I agree for sure. We”ve two classes of problens, one tecnical and the otherone political. The tecnical is that the Geithner”s measures are nt enought to save the systen cause the losses are so huge. The political is that the solution is a kind of heresy to the politic US mainstrean, the nacionalization. And, when we have a very strong lobby of the bank systen, the real solution tend to bem more and more dificult, unless the reality could overcome and, finaly, the US government decide to do the necessary thingRegards,LK

  3. sage   February 12, 2009 at 12:06 pm

    an excellent piece by simon & i agree w/ lk.my concern is that when the govt. finally decides to do the right thing, it may be too late!the govt. also needs to wield a hefty ax at the military/security complex (multi trillion $ wasteful expenditures) & some of the other entrenched special interest/lobby groups that have done enormousdamage to this country. we all know who these groups are & they do not represent the best interests of theamerican people.

    • leoncio   February 12, 2009 at 2:14 pm

      Yes, Sage. We all know who are these groups and I think that two of then are the banks and militaries. its hard to realize, buts is the naked true. and there are more groups. and all of then are very well represented in the government and also in the capitolio. it seens like conspirancy, but…you can see very easily these persons when you watch the tv, everyday, talking about laws, plans…

  4. Anonymous   February 13, 2009 at 12:43 am

    You all are too polite.There are wealthy, greedy interests heavily influencing the course of U.S. Government. Certainly they’ve always been there, but somewhere around the Reagan years they gained a critical mass and moved into the drivers seat.This is a battle between ordinary citizens backed into a corner and the wealthy elite.So far, Obama seems to be favoring the latter.Pay little attention to Obama’s words, save attention for his actions, especially where the lions share of Government money flows. That more than anything else will show who Obama serves.