Policymaking without lawmaking

POLICYMAKING WITHOUT LAWMAKING…. Matt Yglesias highlights a point that I’ve been mulling over: Geithner’s toxic-asset plan can be implemented without Congress.

The reason is that there are federal agencies with a standing authority to make loans. And though the plan does have a potentially giveaway structure, technically what’s being offered aren’t subsidies but no recourse loans. Or to put it another way, the subsidies are in the form of no recourse loans rather than direct appropriations, so the government has the authority to move forward under existing TARP legislation and other laws. That, I think, clearly explains the somewhat byzantine structure of the plan’s operations and is also, if you’re sitting in the West Wing, a considerable advantage over a nationalization plan that would require large additional appropriations to cover the debts of nationalized institutions.

That’s a good point. Nationalization probably would require both lawmakers’ approval and Congress to pony up a whole lot of money. After talking to some administration officials over the weekend, Ezra Klein added, “Virtually no one thinks that Congress is willing to quickly offer either the legislation authorizing such an action nor the massive upfront money that receivership would require. Will Ben Nelson and George Voinovich vote to take control of the banks? And what happens to the market while Congress is debating? And to Congress if the market dives?”

And with that in mind, Kevin Drum makes the case that if nationalization is the last resort, and Treasury wants to show it tried everything else first, the Geithner plan may eventually put Congress in a position where it has no other credible choice.

Like it or not, there’s only one way to get this support: show that (a) one or more of the big banks really is insolvent and (b) every other option for rescuing them has been exhausted. Geithner’s plan does both. If it works — well and good. But if it fails — if nobody is willing to participate, or if the auction demonstrates that the market price for toxic assets really is accurate — then banks will be forced to mark their assets to those prices. Plug in those marks to Geithner’s stress tests and it’s likely to prove to everyone’s satisfaction that some of our big banks really are insolvent. At that point, even skeptics will be forced to accept nationalization as the only remaining alternative.

Politically, I don’t see any other way forward. Bank nationalization will be complex, costly, and contentious. To work, it will almost certainly have to include a broad guarantee of all bank system obligations, something the public won’t be happy about. Congressional support won’t be easy to come by. Geithner’s plan will either work or else it will pave the road for that support. It might not be pretty, but that makes it a plan worth trying.

Of course, Paul Krugman touches on that last point today, arguing, “You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost. Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.”

While I find much of Krugman’s critiques persuasive, I’m not sure about his argument relating to Congress.