The Geithner Plan: Time Is Not on Our Side

Here is the short version of what Simon Johnson, Paul Krugman, Brad DeLong and Mark Thoma said in their discussion of Geithner’s PPIP: no one thinks it is likely to be adequate, Johnson/DeLong/Thoma express varying degrees of optimism that it can lay the political groundwork for more decisive action down the road, and Krugman fears the Obama administration is using up what remains of its political capital and will be unable to take any further action.

I was not asked, but that doesn’t mean I don’t have an opinion. I think these four worthies have all missed the main point: there is a hard limit to the financial resources we will be able to throw at economic recovery. At some point the apparently boundless desire of the world’s portfolios to engorge themselves on T-bills will come to a halt in the form of an interest rate spike and plunge in the dollar. Can I look you in the eye and tell you when this will be? No, at least not if I’m not wearing shades, but I am quite confident the limit is out there. We may hit it in a few weeks or another year or two, or maybe we will be lucky and some how apply a fix before reaching it, but the US is not exempt from the general principle that there is a limit to how much money can be borrowed or quantitatively eased into existence.

The problem with the Geithner plan, as with all other varieties of bailout largesse, is that it depletes our limited resources with no particular likelihood of success. I would ask everyone to consider what our situation will be if the dollar spigot is exhausted before the financial system is back in approximate working order. My candidate adjective: dire.

The alternative continues to be the same: invest public money in a good, new public bank. Make sure the economy has a working, well-capitalized, unencumbered financial infrastructure; then, if you want, sort through the legacy institutions and assets.