Nationalization: The Popular Alternative

Dr. Doom sez that the pain isn't likely to stop anytime soon:

The global recession may continue until the end of 2010 as the response by governments to rectify it is “too little, too late,” said Nouriel Roubini, the New York University professor who predicted the financial crisis.

“Governments are falling behind the curve,” Roubini said at the India Today Conclave in New Delhi today. “This recession can end up becoming even worse.”

The situation can be improved by appropriate policies, including governments taking over insolvent banks, cleaning them up and re-selling them to private investors, he said. The Group of Seven and the Group of Twenty economies “must act together to get out of this mess,” Roubini said.

"The appropriate policies" do not include a plan to giving $1 trillion to hedge funds in the hopes that they'll have better luck making bets this time around. They do not include paying off US and European banks through the subsidiary of AIG, who owes out so much from this collapse that paying them back would effectively cost all the money in the world. They do not include a perhaps faulty assumption that toxic securities have an inherent value that will surely go up once a market is created.

What they do include is the plan that is supported by 56% of the public:

11. Temporary nationalization is another way for the federal government to deal with large banks in danger of failing. This is where the government takes over a failing bank, cleans its balance sheets, and then quickly sells it off. In general, which do YOU think is the better way to deal with failing banks…

29 Government financial aid WITHOUT any government control of the bank, OR
56 Nationalization, where the government takes temporary control?
11 Neither/Other (VOL.)
4 (DO NOT READ) Don’t know

Now, the American people can't be expected to be the most enlightened sort on policies of Swedish or Japanese banking. But the experts who are enlightened basically say this is the solution. And the Obama Administration's claims that such a strategy is not politically viable is only true if you take that to mean "rich people would lose a lot of money and power."

We may be moving toward a tipping point, however. The head of the Kansas City Fed yesterday criticized Treasury in Roubini-like language:

"We ... are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis," Thomas Hoenig remarked in a speech in Omaha, Neb.

The architects of the government response -- primarily Fed Chairman Ben Bernanke, former Treasury Secretary Henry Paulson and Paulson successor Timothy Geithner -- have argued that, because there were no rules to take over big but weak bank-holding companies, they have been forced to play a bad hand and keep the institutions operating and pushing in government money to strengthen them.

But as the cost of this approach keeps expanding beyond the initial $700 billion price tag, there is a growing sense that good money may be being thrown after bad. The fact that the government deals with Citigroup Inc. and American International Group Inc. have been rewritten has added to uneasiness that the rescue plan in on the wrong track [...]

In essence, Hoenig urged the government to scrap any notion that an institution is too big to fail.

"If institutions -- no matter what their size -- have lost market confidence and can't survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses and begin the process of restoring them to private ownership.

"In fact, for failed institutions that have proven to be too big or too complex to manage well, steps must be take to break up their operations and sell them off in more manageable pieces," he said.

Sounds like Hoenig might be a good candidate to replace Tim Geithner. I know it's early, but Geithner seems in thrall to Wall Street, and unwilling to take the necessary steps that go beyond his preconceived notions. This is too critical a time to have the second-most important person in America with such a perspective. If the Administration doesn't fix the crisis with the banks, they'll never see a recovery of the economy. Not in their single term, anyway.