The Importance of Impressions

Given the magnitude of the problems in the financial sector, the government programs initiated to ameliorate the situation ultimately depend on a good degree of public support or, at least, acquiescence. This poses a special challenge when it comes to the arcane issues of the banking system and financial markets.

It is somewhat surprising that in this regard the Federal Reserve has recently done a better job than the Treasury in explaining itself. Normally the Fed is secretive and strives to maintain an aura of omniscience. The attitude they often project is that lay persons need not bother with the details known only by the Fed’s high priests. There is a reason, after all, that William Greider chose the title Secrets of the Temple for his 1987 book on the Fed.

Earlier this month, though, Chairman Bernanke, in an unusual public relations move and a welcome change, granted 60 Minutes an extensive interview. (It can be viewed here.) Whether or not one agrees with all that the Fed has done in response to the crisis, my impression was that the interview served Bernanke and the Fed well. It humanized the Fed chairman, and he explained what he was trying to do. The Fed seems to realize that it is necessary to explain itself as best it can as it continues to take large and unprecedented actions.

It is worth noting that Michelle Smith, who worked at Treasury in Public Affairs and eventually headed it during the Clinton Administration, is one of the key people at the Fed directing its public relations strategy. Secretary Rubin, one of the Treasury Secretaries for whom Smith worked, had one of the best public images of any Secretary while he was in office. Some of the credit for that goes to Treasury's Office of Public Affairs.

The Treasury’s current public image needs improvement. The rollout of the strategy to address the problems of the financial sector was widely panned. The AIG bonus and retention payment fiasco is threatening to undermine that strategy, both because it has weakened public and Congressional support for new initiatives and because it has caused private entities with whom Treasury wants to have help it price and purchase “toxic assets” reevaluate whether they want to enter into a partnership with the government. The New York Times in an article today entitled “A.I.G. Uproar Is a Defining Moment for Geithner” called this week “perhaps the worst week in a string of bad weeks for the Treasury secretary.” Criticism is coming from across the ideological spectrum in Congress and elsewhere.

Secretary Geithner can probably surmount his current troubles if he can provide a credible plan to deal with the current financial problems and can get his political team in place. He also has to figure out how to sell his programs to the public and to Congress. He has some time, but it is finite.

What Treasury and the Administration need to avoid is prompting comments such as that Simon Johnson posted on the Baseline Scenario on March 11: “At last, our long wait to learn the Administration’s policy on banking is over. The policy is: wait.” Somewhat better was David Wessel’s article in today’s Wall Street Journal – “Believe It or Not, Treasury Has a Plan to Fix Banks.” The concluding sentence, though, reads: “The Geithner plan might not work. It does exist.”

Geithner needs to be both creative in his approach to the problems in the financial sector and in explaining his initiatives. We should all hope he succeeds.

Treasury's Troubles

The continued absence of a fully formed, credible plan to deal with the banking crisis is troubling. Alan Greenspan, Paul Krugman, and Simon Johnson all think that some form of temporary nationalization of some major banks is necessary. The banks would be cleaned up, and sold back to the public without their “toxic assets.” The Obama Administration has so far dismissed this idea as impractical. Alan Blinder, writing in Sunday’s New York Times, also criticizes “nationalization,” but his “good bank/bad bank” proposal seems similar. No one is very clear about the details of how their preferred solution would work.

Criticism of Treasury is increasing. For example, Secretary Geithner’s was interviewed for NPR/Planet Money. A post by James Kwak on The Baseline Scenario website takes Geithner to task on his statements concerning valuing bank assets and nationalization in that interview. Simon Johnson, writing for the same website, finishes a comment on the interview by asking: “How long can you say, ‘we are being bold’ when in fact you are not?” Paul Krugman has been equally critical, while some Republicans on the Sunday talk shows are saying that some banks should be left to die.

Meanwhile, the absence of senior political appointees at the Treasury has received significant attention. According to the press, two people who were being considered for top Treasury posts – Annette Nazareth for Deputy Secretary and Caroline Atkinson for Assistant Secretary for International Affairs – have withdrawn from consideration. The Washington Post this morning is reporting that Lee Sachs, who reportedly was being considered for Under Secretary for Domestic Finance, is also contemplating withdrawing his name. It is unclear what is going on.

The press is painting a picture of Secretary Geithner being all alone at Treasury. Of course, this is not quite accurate. Treasury career staff is on the job, as well as political types, such as Lee Sachs, who have been helping in capacities that do not require Senate confirmation. Stuart Levey, Under Secretary (Terrorism and Financial Intelligence), a holdover from the previous Administration, has been asked to remain and is still on the job. Ted Truman, an Assistant Secretary for International Affairs in the Clinton Adminstration and a long-time senior Fed staffer, has agreed to work at the Treasury providing advice on international issues for six weeks.

Still, Treasury needs to fill the Deputy Secretary and the Under Secretaries for Domestic Finance and International Affairs positions and the Assistant Secretary slots reporting to these Under Secretaries soon. Senior career staff cannot speak with the authority of Senate-confirmed appointees, and many may be leery of formulating and advocating bold policy initiatives.

"Bad Bank" -- This American Life

This American Life (a radio program) recently had an interesting show on banks and the financial crisis. It starts out with a very simple and entertaining explanation of a bank balance sheet showing negative net worth. For those of you for whom this is too elementary, stay with the program; it gets more interesting. The program ends with a story of two entrepreneurs in New Jersey who are doing their small part to help homeowners and make money for themselves at the same time. They buy non-performing mortgages on properties they are familiar with at low prices from hedge funds and then make deals with the homeowners.

The most amusing line in the program is during the discussion of a research note written by an economist at Deutsche Bank. The research note states that the taxpayer one way or another is going to pay for the banking crisis. Simon Johnson, a professor at MIT Sloan School of Management and former chief economist at the IMF, call it a "ransom note." At some point someone in the program says something like: "That's a nice global financial system you have there. It would be a shame if anything happened to it."

The program can be listened to or downloaded here.