Tuesday, 24 March 2009

Obama administration on a collision course over Geithner plan?

There are some very awkward politics surrounding Tim Geithner's bank bail-out plan. The administration seems to wish to avoid a show-down with Congress if at all possible. If it started to nationalise banks- as suggested by Paul Krugman, Joseph Stiglitz and others- then the White House would be on a collision course with Congress. That is part of the calculation behind the federal government leveraging private investment to unburden those toxic assets from struggling banking institutions.

However, there really has to be some thought about whether the plan places the administration on another political collision course. There was visceral and popular outrage at the bonuses that AIG executives paid themselves which emerged last week. Here there is a clash of cultures. The public insist on humility and restraint and it is their money after all that bailed out AIG. The Wall Street culture is one of maximising individual reward and ignorant of public scrutiny. Wall Street and Main Street couldn't be culturally more apart.

Geithner's plan will either (a) work; (b) not work. If it works then lots of lenders and fund managers will get very rich. There will be popular outrage and that will be aimed at both Wall Street and the administration. Perhaps if the economy and financial system has recovered by that point the outrage will be more muted than the reaction to the AIG bonuses last week. Nonetheless, the Republicans will do all they can to stir up trouble- they will easily be able to round on Geithner and his staff as representative of an out of touch elite. If the plan does not work- as Krugman rightly points out- then the administration will end up going to Congress anyway and it will do so with one failed plan under its belt and a financial system still in crisis. That would be a political and economic disaster.

So in order to avert a short term political confrontation the administration has risked either a greater show-down or the potential for popular backlash. They will just have to hope that they have an 'it worked' argument to deploy in their defence. No-one said this was going to be easy.

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