Fixing the Banks

Megan responds:

But the stimulus is being sold, at least to us econobloggers, on the multipler.  What’s the multiplier on spending or tax refunds in a system where the marginal propensity to save is rapidly rising, and the banks aren’t lending?  What’s the multiplier on future spending when the relevant companies are capital constrained?

Given that the standard model of the Great Depression has the FDIC and the fixes to the banking system playing a vastly more important role than any FDR spending program, I’d say that the liberal econobloggers bear the burden of proof that fixing the banks is NOT vastly more important than whizzing through green energy spending at the lowest possible level of scrutiny.

This sounds lovely, but I think it glosses over all the crucial questions. Why aren’t the banks lending? I think Megan would be hard pressed to show that the principle reason is something other than a decline in demand for credit and uncertainty over the path of the economy and the ability of potential borrowers to pay. That is, the way to fix the banks is to get the economy going again in order to create profitable lending opportunities for the many solvent banks out there.

That point aside, it’s not clear to me that there’s an obviously better way to handle the banks than what we’re currently doing. There is a case for a Swedish solution — guaranteeing bank liabilities and nationalising where necessary — and I would approve of such a move, but it’s not at all a sure thing that the benefits to such a plan are worth the potential risks. Reasonable people can disagree. The same can be said for other options out there. It’s all well and good to say that fixing the banks is most important. Fine. How? What’s the easy solution that everyone is missing?

I don’t think it’s at all correct to say that the “standard model” of the Great Depression implies a greater role for fixing the banks than for fiscal policy. The banking issues then were quite different. Moreover, there’s ample evidence that fiscal policy was effective when allowed to work, and that monetary policy — and getting off the gold standard — were crucial. Given the circumstances, reasonable people can disagree over whether the most important thing at the moment is to pursue an appropriately sized stimulus, or engage in aggressive quantitative easing, or start guaranteeing bank debts.

And I have no idea why liberal econobloggers should bear the burden of prioritising one thing versus another in any case. Both are obviously important, and both are being addressed simultaneously. It’s not as if the adminstration didn’t do any thinking about the banking crisis while stimulus was moving through Congress. The CBO has had its say on the stimulus, and it’s pretty immediate given its size. Moreover the things that aren’t brilliant stimulus, like the AMT patch, hardly represent Obama, “ram[ming] through his ideological agenda.”

This just looks like Megan trying to find excuses to get off the Obama train. Which is fine; if that’s what she wants to do, then that’s what she’ll do. But saying that she’s not happy with a stimulus that gets pretty good reviews from the CBO, that she’s upset that Obama hasn’t fixed a banking crisis when it’s virtually impossible to say what “fixed” means, and that Obama is ruining his credibility by offering an output forecast that is well within the CBO’s range of estimates and well within the range of forecasts collected by the Wall Street Journal last month, is just reaching, plain and simple.

And again, given the state of the opposition I have a very difficult time understanding why any reasonable person would be having buyer’s remorse.


  1. I’m beginning to wonder if Important Bloggers will ever be able to Just Say No to Megan McArdle.

    In a previous post she is quoted as having “defended” Obama’s candidacy on economic grounds, and, considering the totally binary nature of presidential elections and the fatuity of the McCain campaign, this was pretty much a no-brainer with no obligations on either side.

    Next she does a little moon-walk, conflating the “fixing ” of the banking system with the need for economic stimulus. Memo to Megan- these are two different things that have to work together in some, but not all, places.

    Now, let’s think for a minute about fixing the banks, Great Depression style. First, a very large number of banks go bankrupt and depositors lose everything. Second, you change the basis of your currency relative to the rest of the world- we can use a little mental shorthand here and imagine in today’s world simply printing a trillion dollars of bills. Third, you pass laws establishing bank regulation and inspection tight enough to allow you to insure deposits in a fiscally responsible way.

    It seems obvious that step 1 and step 2 probably aren’t going to happen on this go-round and we don’t want to wait for step 3 before we stimulate the economy. Megan is simply striking a pose that looks stylish to some “econobloggers” who really need to get out more.

    If the situation on the ground is in fact as she describes it, nobody has to explain a damn thing. Having limited capital available when you start a big technological change is a good thing, as you will surely discover things that need to be done differently. Later in the process you can whiz through your green spending at a low level of scrutiny because the size of the change will totally swamp minor irregularities. The problem with the Bush years was not a little mismanagement of a good effort, it was the outright theft of about $4 trillion in the process of doing almost everything entirely wrong.

    Particularly irritating is when Megan tries to ride the “promised to be accountable and non-partisan” hobbyhorse. Obama is just as accountable as any President ever was or will be- nothing has changed or will change there. Of course, what Megan really meant by that was that Obama should do what she wants- sorry, Megan, that’s not how it works.

    As for “non-partisan”, if Obama had promised that, Democrats wouldn’t have voted for him. If he acts non-partisan we won’t vote for him.

    As for Megan’s idea that people who have been out of work for six months are building up their savings accounts- could she possibly be any dumber? Sad to say, I’m guessing ‘yes’.

  2. Peter says:

    Saying that banks aren’t lending because of “a decline in demand for credit” doesn’t square with what we’re seeing in interest rates these days. The spread between treasuries and non-AAA corporate debt is still huge.

  3. BruceMcF says:

    It may well be that banks aren’t lending because prudent banks won’t lend until its clear where the bottom of the recession is going to be … a deep enough decline can take out even blue chip established firms … while imprudent banks already got caught with their pants down and don’t have the wherewithal to lend.