Stimulus, Yes; Bank Bailout II, No

You can say one thing for Sen. Susan Collins of Maine. She is performing the service of giving bipartisanship a bad name.

Maine's current $6.1 billion budget has a revenue shortfall of $830
million, and Maine is facing the same kinds of layoffs and program cuts
as other states. But Collins thinks it's clever to cut from the
recovery package by some $40 billion in desperately needed to aid the
states, in order to....what? In order to show that "moderates" can
force the Obama administration to bend? I hope the lady's phone is
ringing off the hook from bewildered constituents.

One also hopes that the House, where there is no filibuster rule,
will push back, big time. Progressive strategists are talking about
forcing Republicans to engage in an old-fashioned filibuster, with cots
on the Senate floor, in order to shame so-called moderate Republicans
like Collins into allowing the final conference bill to come to a vote.
That would be salutary. But whatever the ultimate size of the stimulus
bill that reaches President Obama's desk, it is likely to be only the
first installment. I will bet that Congress will have to enact
additional spending legislation as the economy seeks deeper into

While the compromise bill has too many concessions to tax cutters in
both parties, at least the administration has the basic concept about
right. The bill is clearly not just meant as a one-shot, but a down
payment on more adequate social outlay and 21st century infrastructure.
As the recession deepens, if Obama does his job he will mobilize public
opinion and isolate Republicans who would rather sink the economy than
give a Democratic president legislative success. The current recovery
bill is a good first step.

The same, however, cannot be said about the even more important
administration initiative, the revised bank rescue plan. If we get the
scale of stimulus spending right, it will put people back to work and
prevent the economy from collapsing for lack of purchasing power. But
if the banking system stays in a state of cardiac arrest, it will
continue dragging down the rest of the economy.

Treasury Secretary Tim Geithner has postponed unveiling details of
the plan yet again, until Tuesday, citing the need to work on the
stimulus legislation. But Geithner and other administration officials
have already leaked enough details to make clear that they lack the
nerve to do what needs to be done.

Geithner has gone out of his way to throw cold water on the idea of
bank nationalization. Rather, the new plan will be some variation on
the original strategy that former Treasury Hank Paulson sought and then
rejected--getting toxic assets off bank books without asking a great
deal in return. The plan reportedly will allocate $50-100 billion for
mortgage relief, but here again this is to be done indirectly rather
than through direct federal refinancing of distressed mortgages.

Here's the problem with this whole approach. The government has not
been shy about telling banks what to do, but has done so in an ad hoc
manner, without adequate information, without a strategic plan, and
without the authority that goes with ownership. The Wall Street Journal
recently published a devastating investigative account of how the
Treasury Department ordered Bank of America to acquire Merrill Lynch, a
deal that turned out to be a disaster for the acquiring bank.
Executives were warned that if they did not go alone with the plan, the
Journal reported, there would be hell to pay.

Basically, the government has been acting as if it owned the banks,
but in a half-backed, scattershot manner. It would be far better to
nationalize the large banks outright, sort out their balance sheets,
and then decide what level of financial relief is required to get the
banks functioning. This prevents the dilemma of government either
overpaying for assets that are currently under water, or failing to
provide enough aid. If government is the owner, then government
actually runs the bank and there is no risk of windfall benefits to
banks at taxpayer expense. When the banks are back on their feet, they
can be sold to new private owners.

The current approach, apparently to be revised only slightly by
Geithner, produces the worst of both worlds. Government is left holding
the bag for the losses, but government lacks the direct tools to run
the banks properly. On the mortgage front, it would be far more
effective for government to simply refinance at-risk mortgages
directly, as the government did in the 1930s under Roosevelt's Home
Owners Loan Corporation.

Obama's problem is that his key economic appointees are averse to
radical solutions to a radical crisis. Geithner and National Economic
Council chief Larry Summers have both been quoted saying that
governments "make poor bank managers." Geithner's own track record as
point man for the rescue efforts of the Bush administration certainly
proves his point, at least as far as his own work is concerned. But in
fact, the Federal Deposit Insurance Corporation, which does take over
failed banks from time to time, has an excellent record of sorting out
their balance sheets, nursing them back to health, and then returning
them to the private sector. The Treasury lacks this competence. This is
all the more reason for government to build up the necessary expertise
and then take over failed banks, rather than just pumping in money and
intervening in fits and starts.

There is time to add more money to the stimulus package if the first
attempt falls short. But time is fast running out on the more urgent
need to get the banking system functioning.

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