Like it or not the United States will be forced to nationalize large swathes of its banking system by the time the leaves fall from the trees in Washington.
The tragedy is that we will have to wait that long and that the costs will mount.
The plan to rescue the banks, or, er, the people, as enunciated by Treasury Secretary Geithner, is no plan, only an apparent set of contradictory principles: an ideological one not to nationalize and a political one not to subsidize too obviously.
The plan will fail unless the administration comes out in favor of either subsidy or seizure of failing banks. Either the United States will be forced to nationalize when that becomes apparent or perhaps it is waiting until that failure makes nationalization more politically palatable.
In either event, it is a terrible mistake and the cost will only grow, both in direct terms for taxpayers and more broadly for the growing number of people with too little income to pay tax.
Geithner laid out a plan to apply stress tests to large banks and require those that do not pass either to raise capital (from whom exactly, I hear you ask) or to accept an injection of convertible securities from the government on terms that have not been defined. Banks that take government coin will have limits placed on their compensation and other actions.
There is $500 billion to $1 trillion to fund an aggregator bank which will "partner" with private capital and set prices for distressed bank assets, presumably with some sort of insurance wrapper to limit private capital's downside. There are also measures intended to generate lending directly to consumers, house buyers and businesses.
All in all, it's a bit like watching a man trying to eat a steak without using his teeth.
"The financial system needs at least $1 trillion in tangible common equity to be sufficiently capitalized - the capital holes on financial balance sheets are just too large to be plugged with convertible securities with vague terms," Paul Miller, an analyst at FBR Capital Markets who has been very prescient, wrote in a note to clients.
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"Another concern ... is that it does not adequately address the toxic assets on bank balance sheets. It does include a variation of a public/private aggregator bank, but private investors will want to buy assets at distressed prices and the banks will only sell assets at above-market prices."
Those two points form the crux of the issue; for the banking system to work without widespread failure and nationalization we either have to hand out huge subsidies to banks directly, in the form of cheap capital, or indirectly, by giving a subsidy to investors who will pass on part of it to banks as a condition of getting their share. The first is unfair, the second unfair and inefficient.
Playing the Long Game in A Short Life
Of course, it could have been worse. We seem to have escaped calls to magic solvency up by suspending mark-to-market accounting, which would have worked as well as making "six" the new "zero."
And in fairness we don't know how the stress tests will work or if it is possible to fail one. But President Obama did tell ABC News that nationalization "wouldn't make sense" because of the scale and complexity of the U.S. economy and capital markets would make it too tough to manage and oversee. He's right and government will do a terrible job of managing banks, but it will be forced to and may as well get on with it. They seem now to be hoping that the economy turns and bails them and the banks out of their pickle, but that is a dangerous bet.
By the time we figure out that it's not working, when whatever capital we have injected is swamped by falls in asset prices - and remember deleveraging and asset price falls go hand in hand - things will be that much bleaker and the United States will have less room to maneuver.
But ironically, maybe the most hopeful sign yesterday was the negative way in which the stock market and shares in banks reacted. Bank investors clearly thought that this raises the chances of them having their equity extinguished or at the very least their share of future profits diminished.
And Obama is not FDR coming in after a depression was already entrenched, he is leading a country which is only beginning to wake up and to suffer. It is just possible, though not likely, that the administration realizes it will have to take more drastic steps but needs more time to prepare the ground and make that politically possible.
One factor which may come into play is international pressure not to nationalise. What is just about possible in the United States would be far harder in economies such as Britain's with larger banking systems relative to their size and borrowing power.