At management team meetings at my old company, there was a slogan I was known for: “No wishful thinking.” I would trot it out whenever I felt like our expectations for the future (say, our sales projections, or our product delivery dates) were being influenced by our desires for the future. Let’s say, for example, that you have to hit your sales target, raise more money, or lay people off. It is very easy to plan around hitting your sales target, because the other options are unpleasant. But that would clearly be folly.
I thought of this when listening to an interview Adam Posen did for Monday’s Planet Money (beginning around the 6-minute mark). The Geithner Plan had not yet been announced, but Posen already had the right diagnosis: wishful thinking. The administration, on his analysis, is hoping that it will be able to turn the economy around without having to take tough measures with the banks.
Martin Wolf puts it this way:
[H]oping for the best is what one sees in . . . the new plans for fixing the banking system. . . .
The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive.
I also thought this was particularly insightful:
Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress.
It does seem like Geithner’s proposals are a kind of effort to piece together a solution given those three constraints, ultimately founded on the hope that the underlying problems are not all that serious. But I’ll stop there. Sometimes we bloggers compete to come up with marginally more interesting ways of telling the same story. For today I’ll just recommend reading all of Wolf’s post.
The Baseline Scenario 
Alot of the criticism of the original TARP program was that the government didn’t follow through on it’s initial plans. With that criticism in mind, maybe this time around the government was less specific with the details to allow for more flexibility for future maneuvers. With so many players in the economic orchestra possibly it’s better to allow for more flexibility initially, when one is the new conductor.
Hope is not a plan. It is in fact the anti plan.
For the people trying to make a plan, political strategies are probably equally important as economic and financial strategies.
Yesterday I was sick so I just sat around and listened to the hearings and to Obama talking in Florida and I read several blogs. Something hit me while I was listening and reading. I think that Rahm and Obama have the banks in their sights and plan to neutralize their political influence. The banks have lots of power in the Congress and can greatly influence what happens. But, to make the recovery plan work, Obama needs to get them out of the way. I wonder if the “stress test” is a first step. During the hearings, a couple senators kept prodding at Geitner about “who is too big to fall”, etc.
If I were trying to do a recovery and systems reform, the banking lobbyists would be my first target.
Today they promised to cooperate with planning a reform. How much of that would anyone believe?
Bob Spencer
“no nationalisation; no losses for bondholders; and no more money from Congress.”
These three constraints do not allow for a solution. That is why the markets tanked yesterday. Something has to give. And based on the research I would recommend that the first constraint be the one that has to go.
Solving the banking crisis (in the US and globally) is only one element necessary to a sustainable and rationale economic solution. The U.S. must lead in this regard – no one else can.
However, Keynesian fiscal stimulus / economic policy is unlikely to produce a sustainable economic expansion no matter how politically palatable at this point in time. Just as the government must be tough with the bankers, it must be tough on itself. The magnitude of Keynesian stimulus about to pass in Congress will be intoxicating to politicians who are already addicted to over-spending.
If I believed it were temporary, it would be easier to accept. It seems clear it isn’t temporary as evidenced by major elements of social policy masquerading as “economic stimulus”.
Thus, the choices are bad: a shorter, but much deeper recession, or a much longer and painful one. By default, the U.S. gov’t – both this president and Congress and the last – appears to be choosing longer and more painful. This will mean more people hurt for longer periods of time.
It’s sad to think this is what the “best” minds can come up with.
Kevin Casey,
First, with all due respect, and as a credentialed economist(there are very few of us left these days), forget the Bank Bill. It’s the stimulus that matters. So far, the Bank Bill looks like a continuation of TARP with a similar lack of details and massive amounts of corporate welfare. It’s the only reason why the stock market imploded yesterday.
Second, a recently released IMF research paper showed that, on average, in credit crunches, the economy recovers six months before the financial sector:
http://www.imf.org/external/pubs/ft
/wp/2008/wp08274.pdf
The rationale for this is fairly simple and quite easy for any layman to understand. Who wants to loan money out when the economy is in a tailspin? Let’s hope that the stimulus plan works before Geithner has a chance spend trillions of taxpayer money unsuccessfully.
The correct link is here:
Click to access wp08274.pdf
Some real hard facts need to be faced first and that is our TOO BIG TO FAIL banks have failed. We just have not admitted it out loud yet. If you thought Lehman was a problem what do think would be the results of voicing that out loud.
So nobody has been here before and all that blah,blah which is actually for once the truth so they are taking very cautious steps on the way to where only they know where.
The Stress Test will be a gentle way of saying (I hope) you’re outta here crook. Then we can put our money where it will be most effective. That’s what everybody is searching for now.