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.