(Via existenz in Quick Hits). Tonight, The New York Times has a new story about tomorrow's forthcoming announcement on the Obama administration's strategy for the second round of TARP money (that is, how the Obama administration will spend the second $350 billion of the Wall Street bailout). If the story is correct, it appears the corporatists in the Obama administration have prevailed over the populists / leftists in the administration on most areas of bailout strategy. This includes, most importantly, placing minimum to no conditions on how bailout recipients spend money, and a decision for the government to not take operational control of any banks.
The story is also a classic case of exactly why cabinet appointments make a huge difference in determining policy. Rather than all appointees simply following orders from President Obama, they take part in a vigorous debate on policy. In this case, corporatist Treasury Secretary Timothy Geithner appears to have won on virtually all counts, even over senior administration advisors such as David Axelrod.
The Obama administration's new plan to bail out the nation's banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president's top political hands.
In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.
Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.
He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.
Some details of the plan are still unclear. However, assuming operational control of many financial institutions, for which so many oft-correct economists have called, is clearly lacking from the plan. While that was always a longshot, the lack of stricter conditions on how bailout money is spent, and even on tougher conditions on executive compensation (although some recently laws passed by Congress might over-ride that decision), is particularly disappointing. Those changes to TARP were actually within reach.
The current plan appears to have at least one positive: it won't result in the administration asking for even more bailout money, as many had originally feared (hoped?). Also, there won't be any "bad bank," as I had strongly feared. However, private investors will apparently receive subsidies so that they can purchase the toxic assets on their own. Thus, it is still a form of "cash for trash." Also, unlike most investors, the government will not receive any operational over the institutions that take its money.
Obviously, since the final decision on how to proceed still rests with President Obama, he shoulders at least equal blame as Treasury Secretary Geithner. Along with his decision to keep Robert Gates on as Secretary of Defense, this new bailout strategy strikes me as Barack Obama's second major error in what has otherwise been a very strong Presidency.
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