What Geithner Needs to Do

The tab may be close to $2 trillion. But what, exactly is the plan? We still don’t know.

Geithner has to raise confidence among two groups: (1) the public, enough to allow the administration to use the second $350 billion Congress has already authorized without too much hollering on Capitol Hill; and (2) investors, sufficiently to get them to buy the banks’ toxic assets (with guarantees from the Treasury and loans from the Fed limiting the investors’ downside risks), and to buy new securities that will finance future loans to consumers, small businesses, and homeowners (also with some federal guarantees and loans limiting downside risks).

At this stage, (1) will be far easier to accomplish than (2).

The public doesn’t trust Wall Street and has big doubts about the Treasury, even under Obama. But the administration isn’t asking for new legislation now. Geithner’s entire program is based on existing authority. That’s just as well, because Congress is still grappling with the $800 billion-plus stimulus, and it’s unlikely that Republicans and Blue Dog Democrats wouldbe willing to shell out even more taxpayer dollars at this stage.

In Geithner’s plan, most of the heavy lifting will be done by the Federal Reserve. (It’s no accident that Fed chair Ben Bernanke sat in the front row at Geithner’s presentation of the outline of his plan this morning.) Fed loans will, it’s hoped, limit investor risk enough to entice them into “partnership” with government. Most members of Congress and 99.9 percent of the public are unaware that the Fed has already committed over $2.5 trillion to the financial system, in order to get credit markets moving again — but with limited results so far. It’s easy to do things through the Fed because there’s scant political oversight of it, and the Fed’s dealings don’t show up as additions to the federal budget deficit. (Yes, we live in a democracy, but not when it comes to the Fed.)

But achieving (2) presupposes enough private investment capital to accomplish most of what needs doing. But where is it? Some at Treasury tell me that they’re counting on hedge funds, among other sources. But that’s merely exchanging one form of opaque financing (the old TARP) for another (hedge funds are black boxes). It’s a dangerous gamble because hedge funds could fall apart just as quickly as other parts of the financial system have failed. Maybe they already have, for all anyone knows. They’re secret, remember? Some additional financing is thought to come from China, Japan, and the Middle East. (It seems likely that some hedge fund financing is now coming from rich Arabs.) But why exactly would Asia or the Middle East be willing to commit even more money to the United States when they’re already nervous about their US loans and investments, and when their own economies are under more and more stress?

Geithner was vague about all this, this morning. That’s understandable. The Treasury doesn’t have the entire plan worked out yet, and also needs some wiggle room in case certain aspects prove unworkable. Too much detail can also attract the attention of critics who will inevitably find fault or raise awkward questions. Remember: Nothing has ever been tried on this scale before.

But the vagueness works against him in terms of both confidence-building objectives. The public wants specificity in terms of where the second tranche of TARP’s$350 billion is going, and exactly how it will translate into more loans and more help for distressed homeowners — and will surely demand more specificity if Geithner comes back for additional authorization. More to the point, investors (whoever they are) need lots of specificity before they’re going to put up a single dollar, no matter how much of their downside risk is assumed by the government.

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