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I read and enjoyed andrewj54's recently posted diary, Krugman's Despair, now on the Rec List, and especially Gooserock's comment (which I've slightly copy edited):

Well as a Sailor I've Got a Lot of Hours In Severe storm conditions with crews and equipment of various capabilities, and having to find ways to jury rig and otherwise finesse the necessary with the possible.

I have also experienced two sinkings.

Sometimes what's necessary is flatly impossible. Sometimes what's necessary had to have been done a long time earlier.

Ships do after all sink.

This got me thinking of what Geithner and Obama would be doing if they were completely perfect progressives intent of doing just what most of us here would want us to do.

My surprise insight was this: it would probably look, from the outside, like almost exactly what we are seeing now.

That doesn't mean that things are really all right, just that there's currently no way for us to know.

Here's the problem:

Say that what you really want to do is to get replace the current sordid banking system with something that can provide its essential functions -- and yes, providing credit is essential, unless you want to unleash the Four Horsemen on the world -- without being dragged down by the need to lie about valuations, the desire to reward and protect cronies, and so on.  How do you do it?

Assuming for a moment that there is an answer -- which, as Gooserock notes, is not a safe assumption -- part of the answer has to be that you do it in one fell swoop.  You do it without warning.  You do it without starting a panic over where future credit will be had.  You do it in such a way that it is a fait accompli and no one who would like to torpedo it for their own parochial ends has a chance to do so.

You build up public opinion so that the public knows that the problem is deadly serious, damn near intractable at best, and that the public will trust your judgment more than that of any available alternative.

Your enemy, the enemy of all progressive reform, is what is called "capital flight" -- the tendency of investors to flee risk and start a panic as they try to grab their money and place it in safer (and often much more unsavory) places.  You prevent capital flight by acting suddenly and without warning, like the parent who knows that a child's bandage will hurt more if taken off gradually than in the blink of an eye, and tells the child: "now I'm going to rip this off on the count of ten: one, two, three, four, five, six, <RIP!> -- now that didn't hurt so much, did it?"

You let investors think that there's a chance that they're going to be bailed out until the moment that they wake up one weekend morning and realize that no, there isn't.  They are the ones who have to take the fall; they are the ones who should take the fall.  You just have to make sure that they stay in place until you're ready to make it happen.

"Making it happen," in this case, means setting up a new system that will be able to provide credit, deposit insurance, and the like while the banks are put into, at a minimum, temporary suspension while the web of paper asset overvaluation due to credit default swaps and the like is unwound.  If this is all done while banks are in a "put offline," perhaps it turns out that the banks are more solvent than we've thought, that their precarious position was mostly due to a cascade effect of the type we see when one institution in a community declares bankruptcy, meaning that other institutions that are relying on being paid by them have to declare bankruptcy in turn, and so on.

Create a system where one institution's debt can be made due to the person way down the line who is ultimately owed money, without short-circuiting everyone in between them, and maybe we can dig our way out of this mess.  The problem is that it probably can't be done while these institutions are "online," because the capital invested in them will flee.  You need to stop trading in these stocks and you have to do it suddenly and without warning.

I don't know exactly what such a system would look like.  I don't know that it's even possible.  I do know that, if this is what the Obama people have been planning to do, it is not something that they could do on Day One or even in Month One.  This is a feat like jumping a train from one track to another track without a switch: there may be a way to kludge something up to get the job done, but it's going to take some incredibly planning and even then it's likely to be ugly.

But it might work.  If the banking system (or the train, if you want to run with the metaphor a bit longer) is in bad enough shape, it may be the only thing that does work.

If you find a way to cancel out the credit default swaps when the banks are "offline," then -- guess what? -- maybe AIG doesn't go bankrupt after all!  Then you don't need a bailout.  If the new, government-run, institution can provide credit to car companies, maybe they don't end up needing a bailout either.  But to make it work, you have to take the banking system off-line.  You can't make these repairs on a live wire.

The problem with Krugman's approach -- announce that you're going to nationalize and then do it when you're ready -- is that between these two steps you will see perhaps unprecedented capital flight.  No one wants to be left holding this particular bag.  You have to get ready first, in secret, then do it -- then announce it as a fait accompli.

If there truly is something about the politics of this crisis that Barack Obama understands and Paul Krugman does not, this is it.  Now, maybe there is no such understanding; maybe Obama and Geithner are doing exactly what it looks like: just trying to hold on, ride the crisis out, feed the investors enough to keep them from stampeding, and hope that they get lucky.  But maybe they are planning what we may call "the shock doctrine in reverse" -- using the technique of surprise against a demoralized opponent to force acquiescence in a move that is going to damage that opponent's interests.  (We can quibble about whether the term truly fits, but the idea of using overwhelming sudden force to achieve a fundamental restructuring, albeit for good rather than evil, is what I'm hypothesizing.)

I don't know that this is what Obama and Geithner are doing, but it seems plausible.  I don't even think it's dangerous for people like us to talk about it, because the people still invested in financials simply won't believe that it could happen.  Maybe it can't.  But maybe it will.

I do know this: if plans to jump the train of the financial system from the private to the public track are underway, Tim Geithner and Larry Summers and Barack Obama cannot talk about it.  They cannot let on that it's even a serious possibility until after it's done.

So, by all means, Paul Krugman and my fellow progressive bloggers, let's keep talking about how the financial system, running on its private track, is heading for derailment, and how the conductors don't appear to be doing anything about it.  If they aren't doing anything, they need to hear this message.  But if they are doing something behind the scenes, we're preparing the public to understand why it was so necessary.

If they do really nationalize -- if they jump the tracks to allow for needed repairs -- the brakes and wheels of the train aren't the only things that are going to be squealing.  We will need to make the case to the public -- repeatedly, overwhelmingly -- for why it was necessary, and especially for why Geithner's friends on Wall Street had to be lulled into a false sense of security and then betrayed.

So, learn your facts, prepare your case, and hope that this is yet one more time -- as in the primaries, as in the general election -- when Obama's preferred path to victory was the Rope a Dope.

If there needs to be a betrayal of Wall Street interests here -- and it seems likely that there does -- let's hope that Obama and Geithner have the brains and nerve to figure out how to do it right.

Suddenly.

Without warning.

Done.

Originally posted to Doane Spills on Fri Feb 27, 2009 at 12:34 AM PST.

Poll

I believe that Obama is planning to betray Wall Street

2%3 votes
7%8 votes
0%0 votes
0%1 votes
6%7 votes
12%14 votes
0%1 votes
1%2 votes
6%7 votes
6%7 votes
0%1 votes
2%3 votes
37%42 votes
7%8 votes
6%7 votes

| 111 votes | Vote | Results

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Comment Preferences

  •  This is to be posed, Pacific Time, at 12:34 ... (38+ / 0-)

    RIP!

    I really don't know if this is what is going on.  But it is probably what needs to happen, and if it is what's going on, what we've been seeing is exactly what we would be seeing.  That's enough, for me, to keep agitating about the need for nationalization while holding my fire at Obama and Geithner themselves.  They may be doing exactly what they need to do.  We won't know until it happens -- or it doesn't.

  •  A very very interesting hypothesis (3+ / 0-)
    and read.
    I'll read it again tomorrow 'cause my brains are addled with sleep.

    Wake me up...we won..

    by soms on Fri Feb 27, 2009 at 12:47:32 AM PST

  •  I find the use of the word (1+ / 0-)
    Recommended by:
    yuriwho

    "betrayal" in your diary and poll off-putting.

    "One of the reasons we were all thrilled Tuesday night is it was pretty obvious this was a collectively intelligent decision." - Al Gore

    by Marcus Junius Brutus on Fri Feb 27, 2009 at 12:48:02 AM PST

  •  I think... (1+ / 0-)
    Recommended by:
    Seneca Doane

    Something drastic will need to be done, and it would happen suddenly as you describe and for the reasons you detail.

    But what does betrayal mean? Or, what would a victory for us look like, and is Obama likely to go that way?  

    •  I think that what you want to see is (8+ / 0-)
      - bank assets correctly valued

      - all debt obligations offset among counterparties

      - banks that end up in the red, once the smoke clears, being nationalized

      - banks that end up in the black, once the smoke clears, being bolstered (in exchange for equity)

      - clawback of bonuses and probably some salary, and probably some imprisonment

      - reinstitution of tighter financial controls, including regulating de facto insurance like credit default swaps as insurance products and serious reform in rating agencies

      - establishment of a government bank for lending

      - no more purchase of financial firms' assets at inflated prices to aid stockholders and/or bondholders

      for a start.

      •  I don't think we're quite there yet... (3+ / 0-)
        Recommended by:
        G2geek, Seneca Doane, Unseen majority

        but at least now everyone's paying attention. I think many of these provisions will need to be instated but even now the political will isn't there to really overturn the current system.

      •  add this to the mix: (5+ / 0-)

        I think the reason Obama et. al. are trying "a bunch of things" we'all think aren't going to work, is so they can say "we did everything we could, but..." before they swoop in and do what needs to be done.

        I've been saying this for a while and getting sneered at.  

        Looks like you & I are on the same page.  The part you got that never even occurred to me is, they'd let the fraudmeisters get complacent and then pull off a fait accomplis (sp?) in the blink of an eye, to prevent capital flight.  Brilliant.  Excellent.  And I hope you're right.  

        Call it "financial shock & awe."

        The fraudmeisters will be in shock, and we'll be in awe.  

        •  I doubt if people are complacent (3+ / 0-)
          Recommended by:
          G2geek, lurks a lot, yellow dog in NJ

          but they're paralyzed and letting respiration return to normal, which will do.

          You're right that they do seem to very openly be trying everything and willing to be seen as, more than one would expect, flailing around.  This could be because "Obama's got a plan," and I hate to be one of those people who always think that Obama's got a plan.  Maybe there's no way to avoid flailing.  Either way, I think that the flailing is good, because even if they're not already to the point I suggest, they are probably eventually going to figure it out after eliminating every alternative, and then they will probably figure out that this is the best way to implement it.

          My real questions are whether a "parallel track" can really be built, whether jumping to a new track is possible, and whether when the CDSs are unwound, anything remains.

          Thanks for the comment and the support!

          •  i don't think "flailing" is the best word for it (5+ / 0-)

            I think they're being systematic in a way that's not readily apparent, rather than "flailing" which implies poking the system at random and waving their arms when it doesn't work.  

            Another diarist who's on one of the links here even suggested they were engaged in deliberate hypothesis-testing & data collection to scope out the depth of the problem.  That sounds highly plausible to me.  

            •  I don't know if they *are* flailing (2+ / 0-)
              Recommended by:
              G2geek, Hawaiian

              Maybe they already know where they're going.  But the massive rewrite just before the fuzzy "reveal" of the Geithner plan suggests to me that they either want people to think that they're flailing, don't care if people do, or have no way to prevent it.  My comment was about how they are perceived, which I think (on the bailout as opposed to the stimulus package) is with some wariness.  (True of me, anyway!)

              •  interesting point (2+ / 0-)
                Recommended by:
                Seneca Doane, island in alabama

                It looks to some extent as if they are trying to fight a monster that keeps squirming away.  

                And yes, I can see where people would get the impression of flailing.  

                To my mind it's because the monster is so darn slippery it's hard to keep a grip on it.  Or it could be that the monster is huge, as in, bigger than any of us imagine even on our most paranoid days.  

                We're going to find out...

  •  I think (6+ / 0-)

    A major fork in the road is coming with Citigroup and Bank of America.

    1. Wipe out shareholders and take over....
    1. Keep pouring money down a black hole....

    Both have their issues obviously, its picking the lesser of 2 evils.  I do think the era of the superbank is coming to an end though, and the thing to watch for is the % of the USA bank deposits one institution can legally hold.  Its at 10% now, and I expect that to be cut in at least half.

    Hey you, dont tell me theres no hope at all Together we stand, divided we fall.

    by marcvstraianvs on Fri Feb 27, 2009 at 01:02:03 AM PST

    •  My guess is that even if #1 is preferable (7+ / 0-)

      it doesn't matter if we're not ready for the train to jump onto the new track.

      Until that happens, we probably have to continue with #2, pouring in money.  Judged on its own merits, it seems to make no sense, to put one's teeth on edge.

      Then again, judged on its own merits, it might not make sense to an observer that the way you catch a fish isn't always by reeling it in immediately as soon as you feel a tug, but may involve playing out more line.

      I agree with your conclusion.  Too Big to Fail is Too Big to Exist.  The problem we have is how we can impose this internationally; the only really good argument for allowing bank consolidation is that if other nations' banks were doing it while ours weren't, ours were going to get their clocks cleaned.  Maybe we can use some international agreements now that we see where laissez-faire has gotten us.

      •  Excellent speculative fiction. (0+ / 0-)

        And fiction sometimes turns into fact.
        Question: If we are "pouring money" into a bank, and we are printing money to do so, can the money be taken back and "repaid" to the treasury thereby taking it off the books if that bank is nationalized?

  •  Interesting, but I think it's more apparent... (1+ / 0-)
    Recommended by:
    island in alabama

    ...than what is being hypothesized about in the diary.

    This is really about (in one phrase): the status quo maintaining itself to the extent that it is enabled to do just that.

    They're so many trillions of dollars into this, already (around $2.5 trillion based upon estimates I've read in the press regarding funds already committed, mostly by the Fed), that a significant portion of what we're seeing play out now is--to the extent there's any transparency here and there's not really that much IMHO--to be taken at face value.

    The truth is the Federal Reserve SYSTEM (not to be confused with the Federal Reserve Board) is at the heart of this status quo play, due to the historically inherent reality that, contrary to popular misunderstanding, our government has far less control over the U.S. banking system than the politicians and the MSM would have us believe.

    If you'd like a real quick education on this, read the Wikipedia pages on the Federal Reserve Board, the Federal Reserve System, and the Federal Reserve Act of 1913.

    It's one of the most enlightening things I've done in the past year as far as current events are concerned.

    There's a 200+ year history behind all of this affecting--quite directly--much of what we're seeing playing out now. It's quite amazing, in fact.

    The same basic argument(s) in play for such a long period of time: does the government control the economy's infrastructure or does the status quo control the economy's infrastructure.

    Not much of a guess here as to the reality...it's the golden rule: The folks with the gold always rule.

    Tim Geithner comes to us directly via the NY Branch of the Federal Reserve System. It's an almost completely private entity...not really much of a "public-private" entity as the spin has portrayed it, at all!

    The Board is much more public-private than the system it's supposed to govern...which, in many ways is another myth, unto itself.

    The FOMC (Federal Open Markets Committee), supposedly one of the most "open" aspects of the entire Fed infrastructure, doesn't even release its meeting notes until many years after the meetings are held!

    As for the Fed System's banks...good luck getting any insight into the inner machinations of that! Not gonna' happen. Why?

    Because the banks in the Fed System OWN the Federal Reserve branches in their respective markets! They're private, non-profit corporations!

    Once you understand the lay of the land, the reality that we're being fleeced for $5 trillion (perhaps much more once everything's said and done) right now, becomes a lot more obvious.

    Check out the Wiki pages!

    (And, when you read them, remember that Geithner comes to us from the presidency of the largest Fed branch, in NY...which may be more powerful than all of the other 11 branches AND the Federal Reserve Board, combined! And, who owns that bank? Citi, JP Morgan Chase, BofA, Morgan Stanley, Goldman Sachs, etc. When you realize the Fed is the entity implementing these bailout funds, everything comes full circle.)

    You really didn't think we had a say in this, did you?

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Fri Feb 27, 2009 at 01:17:18 AM PST

    •  I hear what you're saying, but (4+ / 0-)

      I see no percentage in pessimism.  If there's no way out, then we're screwed whatever we do.  I prefer to assume that there's a way out and keep on looking for it until I die.

      But tell me, since you've read up on this: if these banks are nationalized as insolvent, doesn't the government then own the NY Fed?  What happens then?

      •  The gov't would have to nationalize most banks... (3+ / 0-)
        Recommended by:
        Sparhawk, BenGoshi, Wufacta

        ...for that to happen...and that's not going to happen...in all likelihood, anyhow.

        But, the truth is, most of the major banks are insolvent.

        The answer, IMHO, is to re-legislate the Fed's (the "Board's," and more importantly, the "System's") charter, and to bring it under much tighter governmental control.

        We learned the lesson that "the system" (from mortgages to securities, etc.) needs much tighter regulation and enforcement. And, that starts at the top, with the Fed Board and the Fed System.

        Once we have a saddle on the Fed System, we're then taking over real control of our nation's financial services infrastructure.

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Fri Feb 27, 2009 at 01:33:45 AM PST

        [ Parent ]

        •  I don't think most banks are insolvent, (1+ / 0-)
          Recommended by:
          Seneca Doane

          Not all banks wrote sub-prime. Not all that did kept it on their books.

          Even the ones with sub-prime and bad swaps on their books might not be completely sunk...just leaking badly.

          •  That's not the only problem, though.... (1+ / 0-)
            Recommended by:
            Seneca Doane

            The problem, as I understand it, is that if the government nationalizes only one or two of the most badly hurting banks, then it encourages capital flight from those banks to non-nationalized banks, which makes it harder to keep the newly-nationalized banks afloat. In order for nationalization to work as intended, it needs to be pretty widespread.

            Then again, I'm no expert, and I'm only repeating what others have told me.

            Iraq -- "the wrong war, in the wrong place, against the wrong people"

            by seancdaug on Fri Feb 27, 2009 at 06:54:55 AM PST

            [ Parent ]

  •  You know who else betrayed? (3+ / 0-)

  •  It's a great read (3+ / 0-)

    and a lovely idea.  I have a similar fantasy about how the Obama DOJ's adoption of Bush's legal positions is really an elaborate ploy to bolster the Separation of Powers by forcing the courts to rule on Bushco's crappy unitary executive legal theories.  

    Do you see dancing pink elephants, too?

    Steny Hoyer = a slam dunk argument for term limits

    by jlynne on Fri Feb 27, 2009 at 01:57:38 AM PST

  •  Ye gadz! (2+ / 0-)
    Recommended by:
    Seneca Doane, FarWestGirl

    I'm glad you're on our side. Terrible and spectacular; you have my admiration.

    Coming down the mountain. One of many children.

    by Urtica dioica gracilis on Fri Feb 27, 2009 at 02:11:13 AM PST

  •  Yeah, it's all a cunning plan (0+ / 0-)

    never mind that everything Geithner and Summers have done up till now makes zero sense and is a gigantic waste of money if it is.  Trillions of dollars just so they could have a smokescreen for a couple of months?  But hold on to your illusions for as long as you can.

    •  I was waiting for that sort of reaction (3+ / 0-)

      Thanks for not disappointing.

      They've been in office for a month and a week.  This administration has not spent "trillions of dollars" on financial services bailouts.  If that "smokescreen for a couple of months" is what allows us to put our financial system on a safe track, rather than inviting widespread societal collapse, then it's probably a good deal, especially if we get the vast majority of those trillions back.

      I'm not saying (once again) that this is what's happening, just that it's what could be happening.  But hold on tor your cynicism for as long as you can, for all the good it will do you.

  •  And I'm thinking a bit differently about this (1+ / 0-)
    Recommended by:
    JuliaAnn

    comment, and perhaps a warning as well:

    Well as a Sailor I've Got a Lot of Hours In Severe storm conditions with crews and equipment of various capabilities, and having to find ways to jury rig and otherwise finesse the necessary with the possible.

    I have also experienced two sinkings.

    Sometimes what's necessary is flatly impossible. Sometimes what's necessary had to have been done a long time earlier.

    Ships do after all sink.

    The Titanic was a ship. It was a very big ship. It sank. The sinking was due to incompetence, hubris, and (recent research has shown) fraud. When it sank First Class did fairly well with the life rafts. Otherwise there was a tremendous lose of life, and a tremendous property loss.

    Steerage didn't make out so well.

    One more thing I'll say about that ship: it went down very fast. So fast that it didn't take down all the other ships in the Atlantic Ocean with it.

    •  Just a historical correction.... (1+ / 0-)
      Recommended by:
      Seneca Doane

      The idea that "hubris" was a significant factor in the sinking of the Titanic is an after-the-fact rationale that has been played up for dramatic effect.

      The RMS Titanic was not advertised as "unsinkable" without qualification, and the term only popped up in one or two trade publication before she actually sank, for instance (here's a Wikipedia reference for you). There were certainly a boatload (erm, yes...) of mistakes and poor decisions at play that lead to the sinking, but it wasn't really hubris in the sense that James Cameron et al. have tended to portray it. I'm not sure it was, strictly speaking, incompetence either, so much as bad luck and poor (but not incompetent) decision making at the scene.

      Which makes it quite a bit different from the present banking crisis, IMO....

      Iraq -- "the wrong war, in the wrong place, against the wrong people"

      by seancdaug on Fri Feb 27, 2009 at 06:52:04 AM PST

      [ Parent ]

  •  I always rec your diaries when I see them (1+ / 0-)
    Recommended by:
    Seneca Doane

    for their thoughtfulness and rationality.

    One thing I know, Obama has surprised me before.  I was getting a bit dispirited about the Progressive agenda moving forward until I heard the details of this budget.  It's a good budget, with good priorities.  Krugman agrees.

    Obama's no fool and he may indeed be doing what you're saying.  I think it's plausible.

  •  Taking the banking system off-line (1+ / 0-)
    Recommended by:
    Seneca Doane

    Kind of like FDR's Bank Holiday?

    Excellent point about capital flight.
    Excellent diary overall, where's the tip jar?

    No guillotines were used in the production of this comment. Come see us at Left in Alabama

    by herding old cats on Fri Feb 27, 2009 at 07:25:15 AM PST

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