The N word...

It's pretty bad when things are changing so fast you have to print your own bumper stickers -- or, perhaps, when liberals are so confused they can't figure out what they, collectively, want.

Okay -- not every liberal wants collectivization, but hell, sometimes it's just time.

There are two ways to break up companies said to be "too big to fail." One is to withhold bailout funds so as to force them into bankruptcy, the "let the free market sort things out" method. The other way is for government to wade in and do it. How?

Let's look at the government's options. One possibility, I suppose, is to bring anti-trust suits against the largest of the financial companies. Anti-trust suits, though, take years. We don't have years. Another possibility is for Congress to repeal the loathesome Gramm-Leach-Bliley Act and bring back something resembling Glass-Steagall. Then, presumably, megabanks like Citigroup would be obliged to break themselves up. Given the powerful obligations of members of Congress in both parties to the finance sector, that's not about to happen any time soon.

All that remains, as far as I can see, is nationalization -- government takes over the overbloated banks, wipes out the shareholders, slices, dices, and sells off the healthy assets for a fair price. The taxpayers still are stuck with the toxic assets, but at least it's not a total loss. Writing in the Times, though, former Fed governor Alan Blinder offers what he says is an alternative -- the "good bank, bad bank" solution, in which "the basic idea is to break each sick institution into two. The 'good bank' gets the good assets..." and "the 'bad bank' inherits the bad assets."

Huh? How does government break up the bank without first nationalizing it? And while it's clear that the taxpayers are stuck with the "bad bank," who gets the assets of the "good bank?" Surely not the shareholders -- that would be moral hazard of the worst kind.

The Speech

The president's pre-budget speech last night, and all its accompanying pomp and ceremony, was one of the most brilliant pieces of political theater I've ever seen, and I imagine it effectively reassured a great majority of those who watched. He paid no more attention to detail than Tim Geithner did in his speech last week, but Obama's delivery is so much better. Significant change already is happening, he told us, and there is more to come -- soon.

Most of it was a rehash of his standard proposals, sometimes with fewer details than in previous policy speeches: reform health care, cap and trade carbon, alternative energy, education reform etc. He chastised Wall Street bankers, of course. He criticized the inaction of government in the past, particularly in the field of regulation -- and although he made a point of noting that there were failures by both parties, most people, I'm sure, heard "Bush administration."

So now we'll wait and see what actually happens.

(By the way, if Bobby Jindal had any hope of using his delivery of the "Republican response" as a springboard to the presidential nomination in 2011, I think his hopes were misplaced. Jindal's smiley presentation reminded me of a happy marionette in a poorly scripted puppet show, his repudiation of Bush-era policies and non-threatening ethnic charm notwithstanding.)

Did the Obama speech bring us a little closer to nationalizing some banks? I thought I heard a hint or two. Citi, apparently, has concluded its time is near. Rather than submit to a "stress test," it's just admitting it's as good as dead and waiting to see what the administration's response will be.

It occurs to me that Vikram Pandit decided to get Citigroup out ahead of the herd, hoping to force government action before the political momentum for full nationalization gathers more strength. If that's the case, Obama and Co. may have to be a bit ballsier that they've been to date.

And now the banks...

...again. Or, more to the point, still.

Yes, it's nice to see the ass end of Henry Paulson exiting the Department of the Treasury, but it's also a little disconcerting to see Tim Geithner on his way in. As President of the New York Fed, he was pretty much Alan Greenspan's right-hand man -- anyway, I can't remember him voting against any significant Greenspaniana. Should we assume that Greenspan's mea culpa applies to Geithner as well? I'd be a lot happier if I were sure Obama didn't select Geithner based solely on a recommendation by Robert Rubin.

(Hmmm... What have we heard about Rubin lately?)

So according to all the usual sources, Obama's choices for dealing with the banking crisis come down to these:

• Infuse even more taxpayer money into the major banks, perhaps with requirement that they actually lend it out this time.
  
• Have the Treasury create one glorious, taxpayer financed "bad bank," which would buy all those "toxic assets" from the private banks. This is, essentially, Paulson's original plan.
• "Fence off" the toxic assets by guaranteeing their value, so that banks can go back to doing business as usual without worrying about further write-downs.
• Figure out which banks are "zombies" -- failed banks that will struggle on only with continued large infusions of taxpayer money -- and nationalize them.
  

The "bad bank" idea has been gaining in popularity because it embodies the traditional American approach of socializing all losses while privatizing profits. It rewards the greed and stupidity of those who created the mess, at taxpayer expense, since the only way it could truly save zombie banks is by paying them substantially more than their toxic assets are worth.

Also a contender is "fencing off" toxic assets by guaranteeing their value -- in essence, writing insurance policies on sinking ships. Proponents of this approach don't like to mention it, but there is a less folksy name for that kind of insurance -- credit default swaps, the same kinds of financial instruments that helped get us into this mess. Haven't the taxpayers already eaten enough of those when we bailed out AIG?

Nationalization, of course, is a dirty word. It's the kind of thing those, those Europeans do, after all, and hence completely unAmerican. The fact that it worked very nicely back in the 1990s, when the Resolution Trust Corporation was formed to resolve the Savings and Loan crisis, is being studiously ignored.

Geithner, at least, says that this time we won't be leaping in head first without taking the trouble to see whether or not there's water in the pool. Free market über alles ideology has taken a beating recently, and Barney Frank's leadership of the Financial Services Committee is some cause for comfort. We'll see what happens.

Thank you notes

Yesterday's market gains were quite dramatic, and at least as of this writing, we don't seem to be giving them back today. So who gets the thank you notes?

First, we should thank Barney Frank and anyone else in Congress who helped him slip that provision into the bailout bill which allows Treasury to directly infuse cash into the banks by buying equity shares. Henry Paulson didn't ask for it, and didn't want it, but Congress gave it to him anyway.

Clearly, the former Goldman-Sachs CEO would have preferred to limit his actions to buying those nasty toxic assets from his old pals in finance. Having the power, clearly, was not enough to get him to use it -- and so thanks go out to France, Spain, Italy, and especially the UK for semi-nationalizing their own banks and thereby forcing his hand. (I think a nod is also due to Ireland, which started the ball rolling last week when it guaranteed all deposits in Irish banks. That meant the rest of Europe had to act fast to keep depositors from moving all their money to Ireland.)

So now $250 billion of our taxpayer $700 billion will be buying shares of preferred stock instead of shares of unwanted subprime derivatives. Let's hope the other $450 billion also is diverted from Paulson's original purpose. I suspect there is a good chance that can happen, because it is likely to take more time than the Bush Administration has left in office to chase down the relevant crap and approximate how much it may be worth.

* * *

I'd also like to extend personal thanks to the Nobel Committee that awarded this year's prize in Economics to Paul Krugman. To me, Krugman winning the prize is a kind of personal validation, since my perspective on economic policies coincides with his about 95% per cent of the time.

Did those wily Swedes pick Krugman this year to extend one parting middle finger to George W. Bush? That probably helped them decide to give Krugman the award this year -- but if it hadn't been this year, it still would have happened eventully. Krugman has a marvelous talent for seeing things that are right in front of our eyes, but which other academic economists miss because they are blinded by orthodoxy or ideology. His contributions to the field are very real, and very significant -- and I offer him my sincere congratulations