Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and allow lending finally to resume. Of course, the economy would still stink, but the death spiral we are in would stop.
Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:
First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it must determine which are solvent and which aren't in one fell swoop to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.
The NY Times chimes in with this (as a news item, not an editorial):
The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.
Given that the conventional wisdom is quickly swinging towards nationalization, is Obama's team that far to the right? I don't think Summers is the "fundamentalist" that he's often made out to be. From the NY Times last November:
He is also the centrist who has made it safe for other centrist Democrats to move to the left. Both times I’ve interviewed Mr. Obama this year, he has brought up Mr. Summers, unbidden, and pointed out that Mr. Summers was now writing a lot more about the plight of the middle class than about budget deficits. At Monday’s news conference, Mr. Obama called him “a thought leader.” Back in December 2007, when officials at the Federal Reserve and in the Bush administration were saying a recession was unlikely, Mr. Summers gave a speech with a different forecast. He said that it was “distinctly possible we’re headed into a period of the worst economic performance since the stagflation of the late 1970s and recessions of the early 1980s.” More recently, he predicted that the financial markets wouldn’t return to normal for a long time.
I think that Obama's public relations strategy has been to open up the subject of nationalization for public dialogue, allow experts to weigh in and prepare the country for the eventual step of nationalization. My gut feeling is that nationalization may create more short-term economic pain. This is always a tough thing for a politician to allow to happen, as Obama could be blamed for it.
I am also willing to wait a month or two while they get their ducks in a row. Something like this takes enormous planning. And once they formally announce nationalization, they will want to have the dominoes fall swiftly and surely. As Roubini says, the worst case would be to have banks sitting out there not knowing what will happen to them. The stress testing must be done thoroughly, and then the results released all at once. We will probably have people whining about transparency in the mean time.
Bottom line, this will take some time to play out. If they screw it up, I will be the first to yell at them. But I see the signs that they are going in the right direction.