Weekend Economists Enumerate the Wealth of Nations, February 10-12, 2012

[Demeter]

19. What the Mortgage Deal In The Works Reveals About The Obama Administration

http://www.creditwritedowns.com/2011/03/what-the-mortgage-deal-in-the-works-reveals-about-the-obama-administration.html

...More than ever, Tim Geithner runs the show for economic policy. He is the last man standing of the Old Obama team. Volcker, Summers, Orszag, and Romer are all gone. So Geithner’s vision of bailouts and settlements is the one that carries the most weight.

What is Geithner saying with his policies?

• The financial system was on the verge of collapse. We all know that now – about US banks and European ones too. Fed Chair Ben Bernanke has said so as has Bank of England head Mervyn King. The WikiLeaks cables affirmed systemic insolvency as the real issue most demonstrably.
  
  
• When presented with a choice of Japan or Sweden as the model for crisis resolution, the US felt the Japan banking crisis response was the best historical precedent. It is still unclear whether this was a political or an economic decision.
  
  
• The most difficult political aspect of the banking crisis response was socialising bank losses. All banking crisis bailouts involve some form of loss socialisation and this is a policy which citizens find abhorrent. That’s what Geithner meant most directly about ‘deeply unpopular, deeply hard to understand’.
  
  
• Using pro-inflationary monetary policy and fiscal stimulus, the U.S. can put this crisis in the rear view mirror. Low interest rates and a steep yield curve combined with bailouts, stress tests, dividend reductions and private capital will allow time to heal all wounds. That is the Geithner view.
  
  
• Once the system is healthy again, it should expand. The reason you need to bail the banks out is that they have expansion opportunities abroad. As emerging markets develop more sophisticated financial markets, the Treasury secretary believes American banks are well positioned to profit. American finance can’t profit if you break up the banks.

I would argue that Tim Geithner believes we are almost at that final stage where the banks are now healthy enough to get bigger and take share in emerging markets. His view is that a more robust regulatory environment will keep things in check and prevent another financial crisis.

I hope this helps to explain why the Obama Administration is keen to get this $20 billion mortgage settlement done. The prevailing view in the Administration is that the U.S. is in a fragile but sustainable recovery. With emerging markets leading the economic recovery and U.S. banks on sounder footing, now is the time to resume the expansion of U.S. financial services. I should also add that given the balance sheet recession in the U.S., the only way banks can expand is via an expansion abroad.

I strongly disagree with this vision of America’s future economic development. But this is the road we are on.