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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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March 27, 2009


What do you mean “Fix It?”

Probably like you, I have been consuming mass quantities of commentary on the Treasury's plan to deal with "legacy assets" via its proposed Public Private Partnership Investment Program. The notices are too numerous to single out—Google "Geithner Plan" if you somehow feel you might have missed one—but the New York Times' Room for Debate feature is a reasonable place to get a one-stop view of some divergent opinions the plan has elicited.

I'm not taking sides on the argument, but I was taken with a metric of success that seemed to permeate the Times discussion:

"The market soared on high hopes that this will solve unfreeze credit and revive the crumbling economy. But is this plan sufficient to restore the banking system to health?"

I added emphasis here (with italics), as the notion of restoring the banking system to health (or not) popped up in various ways in the comments from the article's contributing panel of experts. From Paul Krugman:

"We had vast excesses during the bubble years, and I don't think we can fix the damage with the power of positive thinking plus a bit of financial engineering."

From Simon Johnson:

"Secretary Geithner's plan might work, in the sense of facilitating the removal of some 'toxic' assets from the balance sheets of major banks. But it is unlikely to work, in the sense of restoring the banking system to health."

From Mark Thoma:

"How will policymakers be able to tell if the plan is working? The first thing to watch for is whether private money is moving off the sidelines and participating in the program to the degree necessary to solve the problem."

From Brad DeLong:

"… the Geithner Plan seems to me to be legitimate and useful way to spend $100 billion of TARP money to improve—albeit not fix—the situation."

The phrases that interest me are "fix the damage," "to work, in the sense of restoring the banking system to health," "solve the problem," and "improve—albeit not fix—the situation." Each author gives some hint of what they mean by those terms, but in my reading the full meanings are not entirely clear—and I bet not uniform across the contributors.

Let me give an analogy that illustrates why these turns of phrase trouble me. Suppose I have a heart attack, which ultimately leads to bypass surgery. The surgery is successful (by its own measure) and the prognosis for recovery is excellent. Did the procedure "fix" the problem? Not exactly. The procedure put me on the road to recovery, but there will be a protracted period in which I am far from "normal." What's more, it will be an even longer period of time before I am fully up and running on full steam. (And along the way, incidentally, I'd better adopt a new set of rules and regulations governing my behavior, lest I find myself in the same condition again. That will take some getting used to as well.)

So, I wonder, what do most people have in mind when they refer to "fixing" the financial situation, of restoring the patient to health? Do they mean getting back to "normal" or simply being on the road to recovery (even if those travels are slow and painful for some time)?

Given that three of the four authors in the Times debate express the view that more policy steps will be needed, I believe there is an awful lot at stake in determining what success actually looks like.

By David Altig, senior vice president and director of research at the Atlanta Fed

March 27, 2009 in Banking , Financial System | Permalink

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Comments

The US government seems to have developed a chronic bad habit of charging into situations with no clear definition of goals, no measure of success and no exit strategy.
Obama, thus far, has been no different in this regard from the previous administrations.

Posted by: wally | March 27, 2009 at 04:04 PM

"The US government seems to have developed a chronic bad habit of charging into situations with no clear definition of goals, no measure of success and no exit strategy."

Why should they be different from anyone else? That's the way most people and organizations operate, though they may have a veneer of rationalization to convince themselves otherwise. And the government does too.

Posted by: Moopheus | March 27, 2009 at 04:55 PM

Do they mean getting back to "normal" or simply being on the road to recovery (even if those travels are slow and painful for some time)?

This would be my guess. I don't think anyone is so confident to say this will totally fix the problem. All of them would say, "it's a start" and leave it at that to wait and see what transpires (all the while trying to spot the outlier effects).

It's taken a while (in gnat time) but a plan now appears to have taken clear shape.

Determine the gap (stress test), see if it can be filled (PPIP) and if not, unwind some TBTF institutions, insurance companies included (new regulations).

Meanwhile hope the economic declines can bottom and even start to recover, thus making the cost a little smaller.

Posted by: Beezer | March 28, 2009 at 10:36 AM

Great points. Maybe a better question is what was broken? I m not being flip, but I think you need to approach the issue from that angle.

Banks can still borrow and lend money. They just aren't doing as much of it to as many customers.

Posted by: Jeff | March 29, 2009 at 09:40 AM

Hey, the problem is that this supposed 'free market' system lacks the one law and regulation that would make it possible: a rule that no corporation may grow large enough or leveraged enough to be "too big to fail."

Any that can't should be forced to sell itself off in two chunks, promptly.


Posted by: Hank Roberts | March 29, 2009 at 11:24 PM

Hank -- Item 4 on the March 23 joint Treasury/Federal-Reserve statement was the "Need for a comprehensive resolution regime for systemically critical financial institutions." Your views are shared with good company.

Posted by: David Altig | March 30, 2009 at 03:25 PM

The meaning of "Fix it" to the Powers that Be is clear: Return to the 2006 status quo, without suffering losses. See
http://blogs.law.harvard.edu/philg/2009/03/19/simulating-america-circa-2006/

All sane observers outside the system realize that it was an unsustainable excess, but the insiders (including the Obama administration) refuse to admit this.

"It is difficult to get a man to understand something when his salary depends upon his not understanding it."
-Upton Sinclair

Posted by: Hubbert | March 31, 2009 at 08:32 AM

Hi,

The US government seems to have developed a chronic bad habit of charging into situations with no clear definition of goals, no measure of success and no exit strategy.

Posted by: Australian banks | April 01, 2009 at 05:27 AM

Outstanding!
Your anguish is proper. And sadly, you have nailed the crux of the problem.
I wish you were wrong and so FOS you could be kicked into the next county. Unfortunately, you are right.
I never thought I'd find myself on the Atlanta Fed's website reading something like this. The analytical sections of the regional Feds do really good work.
Keep it up.

Posted by: apachecadillac | April 13, 2009 at 10:22 PM

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