Does Peter Orszag oppose Geithner's bank bailouts?

The New Yorker has an article on my old friend Peter Orszag, now Obama’s Budget Director. I’ve completely lost touch with Peter, but he was a close friend when we studied in the same economics M.Sc. program at the London School of Economics. I met the great Joe Stiglitz when Peter let me sit in on a meeting at the Council of Economic Advisors during the Clinton Administration. I ran with Peter on one of his now semi-famous jogs around DC. My wife and I attended Peter’s wedding and still eat off dishes he gave us for ours.

Enough name dropping. I mention our past friendship because it’s relevant to my analysis of Peter’s comments on the Wall Street mega-bailout. I know Peter is extremely smart. Even back in the early ‘90s, it was obvious he was destined to accomplish great things. At Harvard, Stanford and the LSE, I knew many very smart people, but few blew me away with their smarts the way Peter did. He grasped in seconds even the most difficult concepts thrown at us at the LSE.

So I’m somewhat surprised and disappointed by his apparent ignorance of the folly of Treasury Secretary Timothy Geithner’s infinite bankrupt bank subsidization program. He was like a deer trapped in the headlights by Jon Stewart’s questions:

“Why are they bailing out the banks?” Why not the borrowers? [Jon Stewart] went on, “These mortgages went bad, and then they were securitized, and blah blah blah. So that’s all there.” He held up a hand to represent mortgages. “So why not fix the mortgages, not the securities?”…

“Well, they’re doing that,” Orszag said.

“But it’s small,” Stewart said, noting that Obama’s mortgage-assistance program is tiny compared to the bank bailouts.

“Even if you just fix that”—Orszag pointed to Stewart’s hand—“you still need banks to lend to businesses.”

“But wouldn’t they, if you pay this?” Stewart waved his hand, rolling it into a fist.

“Not entirely.”

“Really? Why?”

“Paying all that would be even more expensive.” …

Stewart was not satisfied… He asked Orszag why the government didn’t just bail out borrowers who have defaulted. “The problem is, if you just focussed on the people who defaulted you create this huge incentive to default,” Orszag replied. Stewart looked at Orszag with an astonished grin. Before Stewart could finish pointing out that the government is creating an equally huge incentive by bailing out the financial firms Orszag realized that he had been backed into a corner: “Yeah, none of this is perfect!”

Stewart responded with high-pitched laughter, seeming to suggest that if Obama’s budget director doesn’t know the answer to these questions we are all doomed.

Orszag shrugged. “You know what? It’s good that I’m just the budget guy.” He added, more seriously, “I have to be more constrained, because it really is Geithner’s—so the more we talk budget the more free I can be.”

“He’s the bailout guy?”

“He’s the bailout guy,” Orszag said with a smile. “He gets sensitive about that.”

Orszag’s colleagues characterize him as something of a policy Eagle Scout, always prepared. For two months, I watched and listened to him interact with dozens of reporters—in conference calls, press breakfasts, live TV appearances from the White House—and I have interviewed him half a dozen times this year. His exchange with Stewart was the first time I saw him at a loss. After Stewart left the room, Orszag slumped on a couch and replayed the conversation. “I don’t know that I’m totally comfortable saying why are we not just helping the mortgages,” he said anxiously…

Orszag tried rehearsing a better response until he had crafted something that satisfied him. “The problem originated with mortgages, but it’s now spread well beyond,” he said, “so that even if you go back to the original problem it’s not like you’re—” He started again: “Say you initially got sick from something but then the illness is throughout your whole body.” He sounded more excited. “The infection has spread throughout your whole body! You can’t just go back and fix the hole in your arm. That’s the better answer.”

It is a better-sounding response, but it’s not truly an answer. The Peter Orszag I knew couldn’t rest until he had the answer, not an “answer.” This is a man whose then-girlfriend complained to me after they traveled throughout Italy on vacation that Peter had read an advanced mathematics book — I believe on control theory — the whole trip.

I see two possible explanations: 1) Peter is too busy with the budget to know what’s going on in the financial crisis; or, 2) Peter is not on board with the Geithner “solution” but feels compelled to defend it for political reasons, even though he knows it sucks.

I suspect it might be #2, given that Peter seems to be holding back his true thoughts (“the more we talk budget the more free I can be”) and implies that his offering opinions on the banking crisis bothers Geithner (“He gets sensitive about that”) and was close with Joe Stiglitz, an outspoken critic of the Geithner plan.

Posted by James on Tuesday, April 28, 2009