Wednesday, February 18, 2009

Whatever Gets You Through the Fight

Regardless of whether Tim Geithner and his team reached an epiphany regarding the dubious merits of their now-abandoned plan for the next phase of bank bailouts, or whether Geithner simply realized that there was no way to sell the hoped-for plan to an increasingly hostile public wary of massive corporate giveaways, the good news is that Geithner is re-thinking his loopy approach. In a stroke of good fortune, Geithner's period of reassessment coincides with burgeoning support - including from some unusual places - for a more realistic approach to the banking crisis.

Whether we call the flower in question "pre-privatization," "temporary receivership" or good old-fashioned "nationalization," the endemic aroma remains sage. It is unfortunate that such creative nomenclature is necessary due to Americans' knee-jerk opposition to anything even reminiscent of socialism - despite the reality of our mixed economy and the fact that our government regularly nationalizes unhealthy banks via the FDIC (as Atrios is wont to point out ad nauseam to littel avail). But if tweaking the name facilitates the adoption of good policy, so be it.

Refreshingly, some Republicans, such as Lindsay Graham, are starting to come around - even using the dreaded "N" word - despite intense pressure from within the GOP ranks. Graham recently offered this zinger:

The truth is we’ve put more money into the Bank of America than it’s worth,” Graham said. “That’s not nationalization. That’s just stupid.”

He followed that up with even more GOP heresy: an appeal to pragmatism and empiricism, regardless of the underlying ideological preference. It'''s almost as if he is making an evidenced-based argument!:

“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

Strange days indeed. Alan Greenspan, too, has weighed in on the side of wisdom, without resorting to any of that newfangled parlance of our times:

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Joining this unexpected tandem are economists with slightly better track records in terms of prognostication and reliance on sound models (to go along like Stiglitz, Krugman, DeLong, etc). Nouriel Roubini and Matthew Richardson in the Washington Post over the weekend:

As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late. [...]

Last year we predicted that losses by U.S. financial institutions would hit $1 trillion and possibly go as high as $2 trillion. We were accused of exaggerating. But since then, write-downs by U.S. banks have passed the $1 trillion mark, and now institutions such as the International Monetary Fund and Goldman Sachs predict losses of more than $2 trillion.

But if you think that $2 trillion is high, consider our latest estimates at the financial Web site RGE Monitor: They suggest that total losses on loans made by U.S. banks and the fall in the market value of the assets they are holding will reach about $3.6 trillion. The U.S. banking sector is exposed to half that figure, or $1.8 trillion. Even with the original federal bailout funds from last fall, the capital backing the banks' assets was only $1.4 trillion, leaving the U.S. banking system about $400 billion in the hole. [...]

But unfortunately, the [Geithner] plan won't solve our financial woes, because it assumes that the system is solvent. If implemented fairly for current taxpayers (i.e., no more freebies in the form of underpriced equity, preferred shares, loan guarantees or insurance on assets), it will just confirm how bad things really are.

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.

Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:...

This is the best way forward, and the sooner Tim Geithner gets it/accepts it, the better. And if he doesn't, then it's incumbent upon Obama to assert himself.

Go read the rest for some very sensible proposed guidelines.

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