Experts agree the economy is slowly beginning to right itself, albeit without creating jobs (sadly, there’s no telling how long that particular indicator is going to lag). Can we conclude then that Treasury Secretary Timothy Geithner’s plan was an unequivocal success? The New Yorker asked Robert Kuttner, cofounder and coeditor of The American Prospect magazine and author of the forthcoming A Presidency in Peril: The Inside Story of Obama’s Promise, Wall Street’s Power, and the Struggle to Control our Economic Future, for his take.
Without a successful stabilization of the banking system, even a modest recovery would have been inconceivable. Still, some economists insist that nationalization would have produced an even better outcome. “While the Obama Administration had avoided the conservatorship route, what it did was far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses,” Joseph Stiglitz, a Columbia economist who served in the Clinton Administration, writes in his new book, “Freefall: America, Free Markets, and the Sinking of the World Economy.” Stiglitz goes on, “The government response has set the economy on a path to recovery that will be slower and more difficult than need be.”
Stiglitz could be right—since history happens only once, there is no way to know for sure. But his argument raises several issues. Contrary to widespread belief, the Obama Administration never ruled out nationalization; it simply made it a policy of last resort. Last April, at an off-the-record dinner at the Brookings Institution, Larry Summers was confronted by a number of economists who believed that the financial crisis would not end unless the government took over stricken banks. Summers told the critics that if they were proved right in the following months the Administration would move toward nationalization, and the wait would exact some cost to the economy. But if they were wrong and the Administration moved now it would be like amputating limbs that might instead be saved with strong medicine. “Today, with all of the major financial institutions having a market capitalization of more than a hundred billion dollars and the economy growing again, the judgment not to nationalize but to put an enormous emphasis on raising private capital looks to have been effective,” Summers told me a couple of weeks ago. “I think the critics were wrong, and that Tim’s leadership helped us avoid a lot of things that could have been very damaging.”
The experience of other countries that have taken over banks, such as Sweden, Norway, and the United Kingdom, shows that it can be done quite effectively. Northern Rock, which the British government nationalized in February, 2008, is operating fairly well. Conceivably, the U.S. government could have seized control of some big banks, forced them to boost lending more rapidly, and, eventually, split them into pieces and sold them off, thus alleviating the too-big-to-fail problem. “It would have been temporary ownership and genuine restructuring,” Robert Kuttner, the author of the forthcoming book “A Presidency in Peril,” said. “You would have had more money going out to the rest of the economy sooner, and you would have had an honest accounting for losses. The problem with doing what we did, kicking the can down the road, is that you have these wounded institutions that are very parsimonious with credit, and, even today, nobody knows what their real state is.”