What do you think of what you've heard so far about Timothy Geithner's bailout plan?
I've read about 15 different supposed versions of the supposed plan by now and they're each a little different. Maybe it's not Geithner’s fault because people at the press guess at what they don't know, but I'm a little worried how each time it sounds different—it reminds me of Paulson. I don't get what the plan is supposed to do. It reminds me of the stimulus plan, it’s a long list of things, any of which might be decent, but at the end you're not quite sure what it adds up to. The idea private capital would buy these assets, everyone is for that, but the question it begs is why don't they buy them now? Maybe when you get to the details, it's dealt with, but to me it seems like a lot of different ideas going in different directions pulled together from different sources. It will work if things are fine, but if they're not fine they'll be revisiting the whole thing two months later.
So you don't see a grand vision underlying the administration's approach?
I don't see it. Maybe when it’s announced it will all be clear, but there have been so many changes and fits and starts already that it feels like more of that. It's a sort of finger in the dike approach with no clear vision, but maybe no one has a clear vision. And a finger in the dike is better than nothing. But it's not a great place to be.
What would be your preferred approach to stabilizing the financial sector?
It depends. The key question is how insolvent are all these banks? Arguably Tim Geithner and Ben Bernanke know that and outsiders such as myself do not. If the banks are not in that bad shape, some combination of what they're doing will probably work OK—a lot of different things would. In that case, what the economy would need is a kind of placebo, something to reassure people something will be done and then slowly and surely the banks will rebuild. That's the happy scenario. The bad scenario is that either already or due to impending declines, large numbers of these banks are deeply and permanently insolvent. If that's the case, none of this stuff will work well.
So what would we see then—nationalization of the banking system?
It's already a matter of law that when a bank is truly and deeply unsound the feds have to take it over and do something with it. It's done through the FDIC. This is what we did in the savings-and-loan crisis. But the question is if you're doing that to a large number of banks at once, what keeps your economy going? And I don't really have an answer to that. I think nationalization just puts the problem on the government's balance sheet, but it doesn't get you functioning banks.
Are some of the institutions too big to fail, though? Banks like Citigroup, for example.
Something like Citicorp or Bank of America—they're too big to fail in the sense they're too big to ignore the notion of them not paying their creditors. The losses elsewhere would be massive, so that link in the chain has to be protected. But under the worst-case scenario, if a large number are insolvent and it's a question of trillions of dollars, the notion the government can keep paying these debts stops being feasible. That’s the truly ugly scenario, which I would bet against but I don't feel comfortable ignoring. The fire department is there because your house might burn down, not because you think it will. Right now we're not really ready for anything like that. The plan is to guarantee various aspects of banks and hope that with a guarantee we'll never get there. Maybe that’s as good a gamble as we've got right now. Moving assets off the books doesn't help you any because the assets aren’t worth much, so move them off your books—big deal. So the plan will do some things to restore confidence. It will look a little weak and unsystematic, which concerns me and some bad things could muddle through. If things are bad I'm not sure anyone has a plan. In that sense it's OK, but when it's announced I think it will come across as somewhat underwhelming.
It sounds like a lot of its effect is psychological then.
I would put it this way: The fact they're talking about an itty-bitty plan suggests to me they think things are manageable so it makes me more optimistic. I hope that’s not just them trying to trick me. So you can take their response actually as somewhat of a sign that things aren't as bad as the worst doomsayers are claiming.