Too Big Not to Fail?

Even if a global economic recovery still eludes us, has President
Obama's new team already achieved a stunning turnaround in US economic
policy? Or has the administration just been fighting the last war,
paying far too much attention to ancient history, special interests and
political correctness in its programs to stimulate the economy, fix the
banks and providing debt relief to homeowners?

For lifelong students of the Great Depression like Federal Reserve
Chairman Ben Bernanke and Larry Summers, it probably seems that Obama's
economics team is right on track. In less than a month, Obama has pushed
his record $787 billion stimulus bill through a highly partisan
Congress. The resulting projected federal deficits will be even larger
as a share of of national income than those incurred under FDR, until
World War II. At a time when unemployment is rising sharply, this should
be good news for the economy--if the plan really is expected to be
stimulating.

On February 10, Treasury Secretary Timothy Geithner announced a bold, if
somewhat imprecise, $2.5 trillion program to relieve US banks of dodgy
assets once and for all. Combined with trillions in other loans and
guarantees from the US Treasury and the Federal Reserve, this is
designed to avoid another costly Great Depression-type error, in which
scores of banks were allowed to fail and credit markets seized up. If
the plan really is expected to work, that should also be good news for
the economy.

Bernanke also concluded from his lengthy studies of the Great Depression
that the Federal Reserve had blown it way back then by keeping monetary policy too
tight. So ever since last summer he's made the US money supply as loose
as loose can be, ballooning the Fed's balance sheet to nearly $1
trillion and driving real interest rates down to zero, while pressuring
his counterparts in Europe and Japan to folllow suit.

Obama's team also has emphasized the importance of avoiding the
beggar-thy-neighbor "protectionism" of the 1930s--aside from a little
"Buy American" language in the stimulus bill and a few remarks from
Geithner about China. If loose monetary policy and tighter lips are
sufficient for recovery, it should be just around the corner.

Finally, in the course of Obama's drive to pass the stimulus, he
traveled to troubled communities in Indiana, Florida and Arizona and
heard first-hand that millions of American homeowners and small
businesses could use a little financial aid of their own right now. So
Obama has committed $275 billion of the remaining TARP/"Financial
Stability" funds to this purpose. In principle, this should also be good
news for the economy--if we really believe that the plan has what it
takes to stem the galloping pace of foreclosures and bankruptcies.

Obama and his team may really believe that their first month in office
compares favorably with FDR's in 1933. Historical pitfalls have been
avoided, and there has been no shortage of good intentions, optimism and
action. The new president has also assembled a team that includes, by
its own admission, the nation's brightest economists and its most
experienced veterans of the Fed and the Treasury.

But something seems to be missing. During FDR's first few months in
office, and well into his second term, he received an overwhelmingly
positive response not only from the public at large but also from the
stock market, despite the fact that FDR and Wall Street generally
detested each other.

In contrast, the reaction of global stock markets and market analysts to
Obama's flurry of policy initiatives has been overwhelmingly negative.
In the past week alone, since the passage of the stimulus, the
announcement of the Geithner plan and the president's new plan for
mortgage relief, the stock market has declined more than 10 percent.
Indeed, the country's largest banks and auto companies, which were
supposed to be the beneficiaries of much of these new programs, are on
the brink of bankruptcy.

So what's the problem? Actually there are several problems. The first,
as I noted in part one of this series, "The Pseudo
Stimulus," there really is much less to Obama's stimulus than meets
the eye and far less than will be needed to head off the dramatic
increase in unemployment that is fast approaching.

For reasons of political convenience and a desire to move quickly, Obama
and his advisors decided to appease a handful of key Republican
senators, rather than seize the bully pulpit and rally support around a
larger, more direct spending package with more debt relief for
homeowners.

Ultimately Obama succeeded in getting just three "moderate" Republican
senators and zero House Republicans to support the package. (Eleven
House Democrats also voted against it.) These votes were costly. The
final bill ended up slashing almost $40 billion from the package, while
boosting the share of tax cuts to nearly 40 percent--including almost
half of all relief provided in the critical first year when it is
essential to get the downturn under control.

Most macroeconomists still believe that under conditions of excess
capacity, tax cuts generate much less employment per dollar of lost
revenue than almost any kind of spending, because upper-income types
will save the proceeds or use them to pay down debts. Furthermore, many
of the tax cuts in Obama's bill are regressive, even allowing for his
favorites, "Make Work Pay," the earned income credit and child care
credit. This means their impact on jobs will be even more limited.

For example, of $214 billion of individual tax cuts in the first two
years, $100 billion will go to the top 20 percent, while the bottom 60
percent gets $81 billion. Indeed, for one of the largest single tax cuts
in the bill, the $70 billion reduction in the "alternative minimum tax,"
70 percent will go to the top 10 percent, while the bottom 60
percent--including most unemployed workers--get .5 percent. So Obama's
vaunted plan relies on this premier-class AMT cut, plus another $100
billion of business tax breaks, for 27 percent of its first two years of
"stimulus."

On top of this, Republicans like Arlen Specter also have shown that they
give no ground to Democrats when it comes to sausage-making. I won't
repeat part one's list of trinkets, except to note that almost all the
worst projects survived, and indeed were only enhanced by the solons'
scrutiny.

As a former Minnesotan I'm all in favor of free WiFi for each and every
one of the nation's two million farmers; I've also recently written here
in glowing terms about the merits of government-
sponsored research and development and "green
housing." But this kind of spending has little to do with putting
millions of unemployed people--most of whom are in urban areas--back to
work.

All told, at least $200 billion of this stimulus spending, on top of the
$200 billion of wasteful tax cuts, is not remotely related to the urgent
goal of creating as many jobs as possible in the next twelve to eighteen
months. The cause of recovery was hijacked by a weird coalition of
environmentalists, energy companies, venture capitalists, public-sector
unions, state governors, tax-cut nuts and other special interests.

The stimulus program was supposed to realize Obama's declared goal of
saving or creating at least 4 million new jobs by 2012--even then, at
the average cost of $200,000 per job. According to the Congressional
Budget Office, even that level of job creation would only reduce the US
unemployment rate by an average of less than one percentage point a year
by 2012, for a cumulative reduction of 2.5 to 3 percent relative to the
CBO's projections of what unemployment will look like without the
program.

By the time the Senate got through with it, Obama's stimulus became much
weaker. So most economists now agree that it will be lucky to create or
save even an extra 2.5 million jobs by 2012--about a 1.5 to 2
percentage-point cumulative reduction in the official unemployment rate
by 2012, at an average cost to taxpayers of $315,000 per job.

The contrast with FDR's focus on spending programs, which really did put
people back to work, is stunning.

The Real Unemployment Rate

Recent trends in unemployment help us to understand just how much work
we will have to do to define victory and to see how close we really may
come to another Great Depression.

All the standard measures of unemployment are woefully inadequate, but
the shortcomings change with the times. In good times, with tight labor
markets, conservative economists find it satisfying to remind us that
the degree of "involuntary" unemployment is probably overstated, because
workers can afford to game the welfare system--for example, by
collecting unemployment insurance while refusing reasonable job offers.

In hard times like these, however, official unemployment rates seriously
understate the degree of slack and hardship in labor markets. For
example, in addition to the 13 million people now unemployed (that's 8.5
percent of the labor force) another 7.8 million workers report that they
are underemployed; at least 2.1 million to 5.9 million more (none of
whom are collecting unemployment) say they're not in the labor force
because they've given up looking. By another measure, the peak labor
force participation rate, established when labor markets were very tight
in 1999 and 2000, shows the potential supply of labor not counted as
unemployed is even larger--10.6 million right now.

All told, this means by now there are already at least 23 million to 33
million American adults who are already experiencing increased
unemployment, up from 13 million to 17 million from a year ago. By the
end of 2009, as the official unemployment rate passes 10 percent and the
other indicators of slack labor markets grow as well, this figure will
swell to 40 million American adults--at least 9 million to 18 million
more under-utilized workers than we have now.

A majority of these people have families. Furthermore, the unemployed
population constantly turns over, with a median duration of joblessness
that now exceeds ten weeks. This means that during the next year, up to
one-third of the entire US population will personally encounter someone
facing the harsh realities of involuntary unemployment, and perhaps
homelessness and poverty as well.

These figures omit several other kinds of "hidden" unemployment that are
not recorded in conventional labor force and unemployment statistics:
the 1.44 million people on active duty in the military and the
unemployment they would face if and when they return to civilian life;
the 2.3 million inmates in federal, state and local prisons, all of whom
are omitted from labor force and unemployment statistics; and the
estimated 8.1 million undocumented workers in the United States who are
in the labor force.

In many ways undocumented workers are the most vulnerable victims of the
crisis. Most support families either abroad or home. Many also have been
working hard here for years and have now lost their jobs, without any
unemployment insurance, healthcare, rights to Social Security or other
benefits. And since Congress has not been able to agree on a decent
immigration reform bill, they may not even be able to count on achieving
US citizenship, after years of working and waiting. Now they face a hard
choice between remaining here, unemployed, or returning to violent,
corruption-ridden "Bantustans" in Mexico, Central America, the Philippines and elsewhere.

It's important to take these factors into account when we consider how
this downturn compares with earlier financial crises. Unemployment
statistics for the 1930s are difficult to compare with our current
situation, given the different statistical procedures employed and the
very different demographics in the two eras. But my analysis shows that
it is possible that this crisis may turn out to be comparable to the
situation in 1933, when unemployment peaked at roughly 25 percent of the
US labor force.

This analysis provides a context for assessing Obama's original goal of
creating/saving 3 million to 4 million jobs by 2012. The fact is, even
that original goal simply wasn't anywhere close to being ambitious
enough--and it certainly won't be met under the sadly compromised final
"stimulus" plan. The negative reaction of global stock markets markets
to Obama's plans so far appears to confirm this. We're going to have to
stop the political games and get serious.

Geitner's TARP II

What about the second leg of Obama's new post-Depression economics
policy initiatives, Geithner's plan to inject yet another $2.5 trillion of ("public-private")
capital into US banks to get rid of their toxic assets?

Markets reacted negatively to the plan not because investors necessarily
opposed his new toxic asset buyback scheme. Most analysts felt that his
long-anticipated statement was long on rhetoric about "stress tests and
transparency" but short on digestible content--like being invited to
dinner and then served pictures of food.

Indeed, like his website, FinancialStability.gov,
Geithner's plan remains under construction. But critics may have missed
the point--this lack of detail actually may be a political necessity. If
the American people understood just how high a price the Obama
adminstration may be willing to pay simply to keep our country's largest
failing private banks private, we might need a few more guards at the Winter
Palace.

Tim Geithner is not a former Wall Street insider in the Paulson/Rubin
mold, nor was he ever for a single day a community organizer. He's an
ambitious and cautious policy technocrat, whose lucrative private-sector
career and board seats are still in front of him. We'd be hard-pressed
to find anyone who, at age 47.5, had already punched more establishment
tickets. His grandfather was a Ford Motor executive and Eisenhower
adviser; his father is a Ford Foundation officer who raised Tim on three
continents. He graduated from Dartmouth and Johns Hopkins, became a
consultant for Kissinger Associates, a protege of Robert
Rubin and Larry Summers at Treasury in the 1990s, an IMF policy director
in 2001-2003, a Council on Foreign Relations fellow and finally head of
the Federal Reserve of New York. As of the end of 2008, he was still a
member of the CFR, the Group of Thirty and the Economic Club of New
York, organizations not routinely associated with sponsoring deep
reforms in post-capitalist economies.

Geithner has seen his share of banking crises firsthand: Mexico in 1995,
when the entire banking system had to be re-nationalized; Thailand,
Indonesia and Russia in 1997-98; Argentina in 2001; and now the biggest
one of all right here. All of the Third World crises just noted ended
badly--costly, poorly-managed fiascos that did nothing to enhance the
reputations of the US Treasury and the IMF. But perhaps Geithner was
just an apparatchik. He worked closely last year with Hank Paulson and
Bernanke on Bear Stearns bailout, the Lehman/Merrill decisions, the AIG
takeover and TARP I. So he probably understands full well not only the
gory details of program design but also two fundamental political
realities.

The first is that while nationalizing top-tier global banks may be
politically acceptable in places like Norway, Sweden, Chile, Iceland,
Ireland and even Japan and the UK, it is still viscerally opposed by
most members of the power elite in New York and Washington--including
most of his former club members.

The second is that by now, most American taxpayers have simply had it
with huge Wall Street bailouts, supine members of Congress, overpaid
banker chutzpadiks and high-handed Treasury secretaries. If they
were ever asked, there is no way in Naraka that
taxpayers would ever approve yet another open-ended injection of
public capital into banks--especially one costing three times the entire
"stimulus" and three-and-a-half times TARP I.

So the trick is to not ask them. With bank stocks sinking every day, the
credit crunch hampering recovery and high expectations about policy
changes, Geithner had to say something. But not too much. The whole
subtext of his vague announcement was to finesse the question of
precisely where all the money would come from. The hope was that this
would buy time to line up private capital, perhaps by negotiating some
kind of insurance subsidy that would induce it to participate. The hope
was that this would do enough to stem the decline in bank stock prices
and redirect attention away from the new "N"-word--nationalization.

We've Been TARPed!

The public outrage is justified. Since October, more than 360 US banks
(out of 8,367) have already received at least $353 billion of TARP I
funds from the Treasury. This is by far the largest corporate bailout in
US history, more than twenty times the original $17.4 billion auto
industry bailout.

Of this, more than half went to the top fifteen banks in the country.
This includes $145 billion of capital injections awarded to Citigroup,
Bank of America, JP Morgan and Wells Fargo, the top four US commercial
banks; another $10 billion each for Goldman Sachs and Morgan Stanley,
two worthy investment banks that decided to become commercial banks to
avail themselves of federal aid; and a grand total of $84 billion to the
rest of the US banks. There was also $40 billion in capital injections
and $113 billion in credit in AIG, the profligate insurance company that
sold so many flaky credit derivative swaps to investment banks like
Goldman that it pioneered a whole new new "too fraudulent to fail" rule.
In addition, by now US banks have also received at least $1.82 trillion
of federal loan guarantees and $872 billion in federal loans.

These sums need to be viewed in the context of the staggering amount of
government assistance that has recently been provided to private
financial institutions all over the world. By February 2008, by my
reckoning, banks and insurance companies have already absorbed at least
$817 billion of government capital injections, $251 billion of toxic
asset purchases, $2.6 trillion of government loans and $5.9 trillion of
government debt guarantees. If we added the guarantees for once
quasi-private entities like Fannie Mae and Freddie Mac, the loan
guarantees double to $10.9 trillion.

To put all this in perspective, the 1980s savings and loan crisis cost
taxpayers from $150 billion to $300 billlion in comparable 2007 dollars.
The 1998-99 Asian banking crisis cost $400 billion. Japan's prolonged
banking crisis in the 1990s cost $750 billion. And the total amount of
debt relief received by all Third World countries on the $4 trillion of
dodgy foreign debt that they incurred from 1970 to 2006 was just $310
billion.

Those crises are completely over, while this one is still unfolding, so
its ultimate cost is still uncertain. Already it is clear that ordinary
taxpayers around the world are on the hook for total losses that will
easily dwarf all the costs of all these other recent banking crises
combined--including $2 trillion to $4 trillion of further bank
write-offs beyond the $1 trillion of losses already recognized. Since no
government on earth has the surpluses on hand needed to fund such
largesse, this means that we will be paying for this bailout one way or
another for the rest of our lives, and probably for our children's lives
as well, through increased inflation, taxation and reduced government
services.

Never has so much been given to so few by many. Yet despite all this
public generosity, much of the US banks' recent behavior been execrable.
For example, in December we learned that the US Treasury got preferred
securities in exchange for the first $254 billion of TARP funds that,
right off the bat, were worth $78 billion less than the funds they
received.

We've also watched with amazement as they've continued to fund corporate
jets and other perks, and as several of the largest recipients of TARP
funds have paid extravagant bonuses to senior executives for
"performance" in 2008--a year when the banking industry contributed
mightily to the tanking of the entire global economy. Nor have most
banks been forthcoming about what they've actually done with all the
TARP money--except to to concede that they haven't done much new net
lending. After all, they say, in this economic environment, with
regulators suddenly breathing down their necks about leverage and toxic
assets, they are not eager to take risks.

That's all well and good at the micro level, but at the level of the
overall economy, we badly need banks to swallow hard and start churning
out new loans--and not just to gold-plated borrowers who don't really
need the money. Since TARP I funds were not dedicated to new lending,
and, indeed, since policy makers like Paulson, Bernanke and (presumably)
Geithner decided to leave TARP I's use entirely up to the banks'
discretion, this period of extreme largesse and low interest rates has
also coincided with tight credit markets--except for well-off
corporations and elite borrowers and refinancers, who have actually been
the main beneficiaries of Bernanke's low-interest rate policy.

So while both the Federal Reserve and the Treasury have been busy
demonstrating that they have finally taken the lessons of the Great
Depression to heart, and have been setting records for generosity and
loose lending, at the end of the day they still allowed the private
banking system to keep its elephant in the hallway, blocking the road to
recovery.

'Net Worth? I Don't Got To Show...'

In the four months since receiving the first TARP Installment, the US
banking industry has become a supersized version of the US auto
industry--on the verge of bankruptcy, kept afloat by government capital,
loans and loan guarantees, with no long-run strategy other than to
continue its well-funded lobbying efforts and heavy campaign
contributions and to occasionally show up in DC before toothless
Congressional committees for well-choreographed rituals of contrition.

Since October 2008, the net worth of the entire US banking system-- all
8,367 domestic-owned US banks--has declined by $420 billion, to just
$540 billion. In other words, TARP was one of the worst investment
decisions in corporate history--the banks' net worth has declined by
more one dollar of equity value for each additional dollar of TARP funds
injected.

Indeed, the net worth of two of the largest banks in the system,
Citigroup and Bank of America, is now around $30 billion, less than half
of the $70 billion in government capital that they have received from
TARP I, on top of $424 billion of federal loan guarantees. Not only has
their own "value added" during this period evidently been negative. For
a fraction of the funds we've given these two banks, we could have
stopped begging them to clean up their balance sheets, restructure their
mortgages, stop wasting money, change their compensation plans and
initiate sensible new lending programs. We could have bought a
controlling share, hired new management from the droves of idle bankers
now out on the street and re-privatized them at a profit for taxpayers
in two to three years--just as successful "turnaround nationalization"
programs have done again and again in these situations, from Norway to
Chile.

No wonder that growing numbers of critics--not just hard-core lefties
and Nobel laureates like Paul Krugman and Joseph Stiglitz but even
pragmatic politicians like South Carolina Republican Senator Lindsey
Graham--have started to break the taboo and talk explicitly about
"nationalization."

But in an important sense the taboo had really already been shattered by
TARP I, last year's expansion of FDIC deposit insurance and all the
other new federal loan guarantees for the bank. In effect, these already
"nationalized" the banks' debts. Now we're just talking about the other
side of the balance sheet, where there might at least be some value, if
only under new management.

The Toxic Alternative

Geithner is hardly unaware of this short-term nationalization approach
to the credit crunch, or of the success it has in many other markets.
But he has apparently rejected it in favor of a much more costly and
uncertain route--establishing a public-private bailout fund that will
somehow entice the banks to sell off their lousy assets and still have
enough equity left to survive as private entities.

The limitations of this approach are best understood by taking another
close look at Citigroup and Bank of America, two of the most troubled
institutions in this story. On their most recent balance sheets reported
to the FDIC, these two big banks alone accounted for $4.1 trillion of
official on-balance-sheet "assets"--mostly loans and federal securities,
but also a hefty amount of potentially dodgy mortgage-backed securities
and other asset-based securities.

Right off the bat, therefore, at least by the accounting numbers, these
two top banks alone now account for more than 30 percent of all the
assets outstanding in the entire US banking industry. Indeed, the top
fifteen banks account for over 60 percent. This represents an incredible
increase in banking industry concentration since the early 1990s, when
Citibank and Bank of America held just 7 percent of all US bank assets,
and the top fifteen banks held 21 percent.

This increase in industry concentration was hardly an accident. It
originated in the desires of bank executives to grow, boosting market
share, short-term earnings, stock prices and the executive bonuses
driven by those metrics. But it also reflected the gloves-off stance
that Congress, regulators and antitrust enforcement took toward bank
expansion during this period. And that, in turn, was probably related to
the more than $1 billion contributed by the financial services industry,
their lobbyists and law firms, to politicians of both major parties
since 1990, which turned the Senate Banking Committee the House
Financial Services Committee and other key Congressional committees, in
effect, into wholly owned subsidiaries of the banking industry.

Now how much might all these assets on the banks' balance sheets
actually be worth? There is no active exchange for most bank assets,
especially those that are hardest to value in this environment, like
mortgage-backed securities. And by law, the banks are permitted to value
the assets on their books at "fair market value"--in essence, whatever
their accountants tell them they are likely to be worth, given
historical experience with loan losses. But the difference between these
accounting numbers and today's market value for these assets may be
huge--up to half or more of book value. And the banks have a strong
incentive to hold on to the loans and hope that things get better,
rather than sell them off right now at whatever the market will bear.
After all, as soon as they start selling down one loan bundle, they may
be required to "mark to market" all similar ones. And the resulting
writedowns might well be enough to wipe out all stockholder equity,
leading to insolvency.

This whole situation is reminescent of the 1980s Third World debt
crisis, when banks like Citibank, Morgan and Chase resisted for years
the demands of policy makers and developing countries to write down or
sell off the billions of overvalued loans on their books--for no other
reason than, as one former Chase banker put it, "a rolling loan gathers
no loss." Similar behavior occurred during the prolonged Japanese debt
crisis of the 1990s, when banks stubbornly resisted the efforts to get
them to "mark to market" because several of them realized they would be
bankrupt and no longer with us if they did so.

There's not really much moral culpability here. At ground level, from
the standpoint of any individual bank, this behavior is understandable.
After all, they have just gone through a period of careless
underwriting, and are trying to reduce their loan losses and improve
their capital ratios--just like most bank regulators want them to do.
The larger banks have balance sheets that are best described as follows:
"On the left side (assets), nothing is right; on the right side
(deposits and other capital), nothing is left." And since the economy is
still slipping at an unpredictable pace all around them, no loan officer
is eager to take on more risks. So it is hardly surprising that in the
last quarter of 2008, even as the TARP money started to flow, US bank
lending suffered its sharpest decline since 1980. It also makes perfect
sense for them to resist selling off its loans and securities at what
may eventually turn out to have been fire-sale prices.

While all this may be well and good for bankers, however, for rest of us
it means that even after all those trillions in federal bailouts and
loan guarantees, the economy is still starved for credit. The fact that
major banks as a group continue to sit on all these lousy loans at book
value, rather than selling them off and writing them down, means that
they don't have much room on their balance sheets and in their
capital/asset ratios for new loans. So the credit crunch continues. And
banks that we eventually may find out were really insolvent may walk
around in a trance for months or even years, like a scene from Night
of the Living Dead. We're not talking about restoring the loose
lending of the 2005-2007 bubble; we're talking about the essential
liquidity needed to keep the wheels from coming off, stimulate demand
and stem the decline in housing prices.

Citi-Zombi

The importance of all this becomes clearer when we take a close look at
the composition of Citigroup's and Bank of America's $4.1 trillion of
assets outstanding. It turns out that these include $1.3 trillion of
real estate loans and mortgage-backed securities (22 percent of the US
industry's total), $153 billion of credit card loans (38 percent of the
total) and $150 billion of auto loans, student loans and other loans to
individuals (25 percent). Clearly all these book values may be severely
at risk in the current economic crisis.

But these potentially troubled categories of assets only add up to about
$1.6 trillion; why is Geithner talking about a $2.5 trillion program?
The FDIC's latest statistic a provides a clue. It reveals the dominant
role that the country's top banks have also played in issuing
derivatives, including not only interest rate and currency swaps, but
also in more notorious debt-based over-the-counter derivatives. As of
September 2008, JPMorganChase, Citigroup and Bank of America accounted
for an incredible 90 percent of $7.9 trillion of these "off-balance
sheet" credit derivatives that have been guaranteed by these banks
themselves--including $2.6 trillion guaranteed by B of A and Citi. So
when Secretary Geithner was talking about running "stress
tests"--scenarios for future housing prices, default rates and interest
rates--against the balance sheets of particular banks, he was not
talking about First Federal of Tuscaloosa or Suffolk County National in
Riverhead. They've probably never guaranteed a credit derivative in
their lives, much less tucked anything away in some Cayman Island
"special purpose vehicle." Clearly, Geithner had his friends on Wall
Street in mind.

A Political Problem

In short, we have a choice to make: we can spend perhaps $150 billion to
$200 billion buying out the equity of a handful of leading banks that
have gotten themselves in this mess and reform them. This would involve
taking them over immediately, installing new managers, giving their
creditors a
haircut, writing down the toxic assets (which the government-owned
bank could do without fear of market reactions) and then preparing them
for privatization when the market recovers.

Or we can follow Secretary Geithner's lead, fiddle around for months,
throwing trillions more of government capital, loan guarantees and
portfolio insurance at the problem, without any guarantee that the
resulting cockamamie approach to creating a "public-private" toxic bank
will ever work--while the same old troubled institutions are left
standing, no longer encumbered by their dodgy assets perhaps, but still
encumbered by dodgy managements.

There are lots of technical issues to be weighed in making this choice.
But after reviewing all the objections to the kind of short-term,
temporary, partial nationalization, I'm convinced that the most
important issues are simply political, a choice between our commitment
to a failed, hands-off model of bailouts and banking regulation and
decisive, FDR-like action.

It is precisely because it is so hard to value these dodgy assets at all
that we are even having this discussion. Given the absence of
competitive markets for the assets, the uncertain environment and their
dependence on taxpayer subsidies and insurance, the prices established
are intrinsically political. Either they will be set so low that banks
will have to take such massive writedowns that their shareholder equity
will disappear entirely anyway, or--more likely--the prices or insurance
arrangements will be set so that even more taxpayer wealth is
transferred to these very same top-tier banks.

Meanwhile, the whole economy is hostage to this decision. We have no
time to waste. We should get on with it, making use of one of the
clearest market signals available in this situation--the current value
of Citibank and Bank of America shares.

This argument is not at all anti-market, or necessarily even anti-bank.
At their best, private markets, entrepreneurship and innovation are
absolutely essential. My real objection is to a very specific kind of
bank-dominated political economy. To call this "capitalism" is to have
Ayn Rand and Friedrich von Hayek turning somersaults in the crypt. Time
and again, this pathological form of pro-bank development has
jeopardized the prosperity, stability and innovation of the small
businesses, inventors and would-be savers who are the backbone of market
economies. Bank-dominated political economies don't really deserve to be
called "capitalism," since big bankers have never really been
entrepreneurs who are content to stick to the capitalist rules of the
game. Instead, they periodically demand the divine right to take
unlimited risks, privatize the resulting gains and stick the rest of us
with any resulting losses.

It is time for accountability, we are told by our new president. If so,
we should start by holding the world's largest banks, hedge funds,
insurance companies, mortgage brokers and private equity firms, together
with their many friends in accounting, law, public relations, credit
rating, central banking and higher office accountable for this
crisis--if in no other way than by refusing to award them this even more
massive TARP II bailout, permitting them to rob us, once again, with
both hands.