From yesterday's Midday Open Thread:
here's Krugman:
Every plan we’ve heard from Treasury amounts to the same thing — an attempt to socialize the losses while privatizing the gains. [...]
the insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice? That is, are they stupid, or do they think we’re stupid?
At this point, just about every reputable economist and policy maker outside the government has come out in favor of taking over the insolvent big banks (just like we have been doing to all the little ones), firing their boards of directors, cleaning up their balance sheets, and reselling them back into private hands (the largest ones in pieces so they are no longer "to big to fail").
Obama's own remarks on the subject show that he actually does get it:
There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model.
Obama went on to say that our "culture" will not allow us to follow Sweden's example, but that comment from 3 weeks ago has to be inoperative now, given all the calls, from respected figures on all sides of the political spectrum, for the government to actually USE the money it's throwing around to make necessary changes instead of continuing to give free rein to the people who created the crisis.
No one can argue that they don't have political cover for this when Mr. Republican, James Baker, the man who made sure Bush got (s)elected President writes (via Calculated Risk quoting the Financial Times):
[T]he US may be repeating Japan’s mistake by viewing our current banking crisis as one of liquidity and not solvency. Most proposals advanced thus far assume that, once confidence in financial markets is restored, banks will recover.
But if their assumption is wrong, we risk perpetuating US zombie banks and suffering a lost American decade.
...
First, we need to understand the scope of the problem. The Treasury department – working with the Federal Reserve – must swiftly analyse the solvency of big US banks. Treasury secretary Timothy Geithner’s proposed “stress tests” may work. Any analyses, however, should include worst-case scenarios. We can hope for the best but should be prepared for the worst.
Next, we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage.
By all accounts, Geithner's stress test is a joke: a "test" designed to give insolvent institutions a passing grade instead of really determining their status. This will allow him to throw still more taxpayer dollars that the banks can use to pay lavish salaries and bonuses, fly around in corporate jets, hire PR firms, etc. Geithner has repeatedly said that "nationalization" is the wrong way to go and is designing his "test" to avoid it.
But virtually all leading economists say that without real changes in the banking system, we will end up just like Japan in the 90s with our own "lost decade" and the stimulus (and Obama's presidency) will go to waste. This is the surest way to bring the Republicans back to power, and they are counting on it.
Obama himself identified fixing the banking system as one of the legs of the stool. Yet he and Geithner seem hellbent on following the failed Japanese model.
Since Obama chose to stock his cabinet with people who are part of the problem and the corrupt culture that created it (Robert Rubin proteges like Geithner and Summers), it is incumbent on the rest of us to get his attention so he'll listen to other voices (one of whom, Paul Volker, Summers is apparently blocking from seeing Obama, even though Volker is Chair of the President's Economic Recovery Advisory Board!).
So please do whatever you can including, at a minimum, calling the White House comment line at (202) 456-1111 AND using the White House online comment form.
Please use the comments to suggest other ideas for making Obama do what he acknowledges is the right thing.