Wanted: Political Will

Douglas Holtz-Eakin, John McCain's chief economist during the Presidential campaign, makes the case for temporary bank nationalization. That it comes after a swipe at the federal government's ability to participate in the economy makis it even more jarring.

I remain convinced that the financial crisis is the greatest threat to the U.S. economy. It should be the top policy priority and, since I think it will be very expensive, the top budgetary priority as well. Unfortunately, at the moment it does not appear that either the public or the Congress displays any willingness to devote more taxpayer dollars to addressing the crisis. We need to shift the policy tactics and the public perception right now.

The right thing to do is to apply the principles of responsibility and competition, and the lessons of history to get this right. The most important lesson is that failed, insolvent banks cannot be permitted to continue to operate using taxpayers’ subsidies. Letting these “zombies” walk the financial system was at the heart of the savings and loan crisis and the slow Japanese recovery from its financial crisis. These institutions should be taken over, their management and shareholders suffer the consequences of their failure, and the assets re-sold to private sector entities as fast as is feasible. That’s good policy: discipline failure, promote real competition, and use assets effectively in the private sector.

Doing business that way eliminates “bailing out the banks” and “saving AIG” from the public discussion, and hopefully will make taxpayers more willing to open their wallets to solving the problem. Yes, it will be costly – but the cost is the price of not allowing the unwinding of individual institutions to cause a chain reaction of financial collapse.

If an economist who is predisposed to bash government, who ran a campaign for an anti-government crusader, can understand the necessary steps to get us out of this mess quickly and with the least damage possible, this really is no longer an ideological issue. You have Douglas Holtz-Eakin, Alan Greenspan and Harold Meyerson on the same side of an issue, ferchrissakes. And Meyerson hits on the main reason why this hasn't been done yet - a continued thrall to the banksters instead of a dispassionate analysis of the best option for the entire population instead of a handful of elites.

But Geithner's indulgence of bankers' indulgences is fast becoming the Obama administration's Achilles' heel. The AIG debacle is the latest in a series of bewildering Geithner decisions that threaten to undermine the administration's efforts to restart the economy. So long as it's Be Kind to Bankers Week at Treasury -- and we've had eight straight such weeks since the president was inaugurated -- American banking, and the economy it is supposed to serve, will remain paralyzed. The Geithner plan to restart the banks provides huge taxpayer subsidies to hedge funds, investment banks and private equity companies to buy the banks' toxic assets without really having to assume the risk. That's right -- the same Wall Street wizards who got us into this mess, using the same securitization techniques that built mountains of debt within a shadow financial system that remains unregulated, are the saviors whom Geithner has anointed to extricate us -- with our capital, not theirs -- from the mess that they created.

A more plausible solution would be for the government to assume control of those banks that are insolvent, as it routinely does when banks go under. It could then install new management, wipe out the shareholders, take the devalued assets off the banks' books, restart lending and restore the banks to private control at a modest profit for the taxpayers. There may be reasons that Geithner's plan makes more sense than this one, but if they exist, Geithner has failed to explain them.

There are simply too many questions with the public-private partnership idea. I understand the desire to keep the ultimate costs low. But considering that the quantitative easing program being run out of the Fed is virtually GUARANTEED to lose the country $200 billion at the low end, I don't think we should fool ourselves anymore with the bromide that a bailout can pay for itself. We either pay now or light a bunch of money on fire and pay more later. And so trying to make hedge fund managers partners in a scheme that is fated to fail, with only the private interests taking the upside, makes no sense. The ultimate question that supersedes everything right now, as even Ben Bernanke acknowledges, is whether or not we will have the political will to take the necessary steps.

In fall 1997, a key issue for Indonesia’s IMF program was whether the government could close the banking operations belonging to one of President Suharto’s sons. There was an epic and fascinating struggle and, in the end, the government did not have sufficient political will or power. The subsequent loss of US support, and further currency and economic collapse is (messy and painful for many) history.

It is striking that Ben Bernanke now asks whether the United States today has sufficient political will.

Right now, I'm not seeing it.

...Today Bernanke is trying to build the political will out of the sand we currently have.

"We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities," he said in prepared remarks to a community bankers convention in Phoenix.

"Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating," he said.