The New N-Word

Robert Borosage lays it on the line:

The Obama administration has made its first serious misstep. No, it wasn't the wooing of ingrate Republicans, or the dining with clueless reactionary pundits. It is much more significant. Faced with the failure of the Paulson-Bernanke banking bailout, the Obama administration has decided to double down. The new plan, described in broad outline by Treasury Secretary Tim Geithner on Tuesday, antes up another $1.5 trillion or more to keep the banks afloat.

Major economists, including Nobelists Joseph Stiglitz and Paul Krugman, crash predictor Nouriel Roubini, Nassim Taleb, and Dean Baker, say it's time to nationalize the banks -- before, not after, they make the money disappear. The Geithner plan won't touch nationalization, or at least not by name. It's the new n-word.

Financial Times' Martin Wolf says Geithner is calling an empty glass half-full:

The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive....

All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.

Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the “super-SIV (special investment vehicle)” proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.

Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities....

But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government....

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress.

As Borosage points out, no nationalization leaves banks insolvent; no bondholder losses means taxpayers pick up the tab; and cutting off funds from Congress undermines public confidence in the banks, guaranteeing failure.

Wolf again:

What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

Read Borosage at Huffington Post.
Read Wolf at Financial Times. ey