"Nationalizing the banks sounds more radical than it is"

William Greider on the Nation basically supports my position, but he thinks that it's more radical than it is. My position is nationalize, then privatize. It's going nowhere,but at least I can quote people, like Greider, who basically agree with me:

"The scale of this disaster explains why the Treasury secretary had to abandon his original plan to buy up failed mortgages and other bad assets from the banks. If government paid the true value for these nearly worthless assets, the banks would have to write down huge losses or, as Levy economists put it, "announce to the world that they are insolvent." On the other hand, if Paulson pumps the purchase price high enough to protect the banks from losses, $700 billion "will buy only a tiny fraction of the 'troubled' assets."

The uncertainty and complexity of the plan made it unworkable.

"Obama can begin by declaring a "bank holiday" like FDR's in 1933--an opportunity to put the hard facts on the table and assume temporary control of the entire financial system. Nationalizing the banks sounds more radical than it is, since banking law already empowers regulators to impose extraordinary controls and close supervision over troubled institutions. Facing facts will be painful, but it's better than continuing a costly charade. Paulson's approach, endorsed by many Democrats, was designed to preserve oversized Wall Street titans. In fact, Paulson and the Federal Reserve are making things worse by creating new members of the privileged club of "too big to fail." Public money is being used to finance bank takeovers that will become new behemoths. "

This is correct. The tax subsidies for mergers was intended to facilitate a market solution, with tax concessions, of course, by having banks merge, thereby saving the government from intervening. However, you do have to count the tax incentives. This isn't a good idea, but one can understand why mergers are better than dissolution.

"A genuine solution means closing down the hopeless institutions and creating a more democratic system based on small to medium-sized banks, financial intermediaries that are less imperious and closer to the real economy of producers and consumers. The Levy institute suggests that some banks are "too big to save." If the president-elect seeks an opinion quite different from his circle of orthodox advisers, he could start with the institute's tartly incisive analysis "Time to Bail Out: Alternatives to the Bush-Paulson Plan," by Dimitri Papadimitriou and Randall Wray. Their perspective is Keynesian, not market worship. They argue (as The Nation and others have) that the bailout is proceeding backward. Instead of saving Wall Street first, government should devote its heavy firepower to reviving jobs, incomes and business enterprises. The banks will not get well or begin normal lending until there is overall economic recovery."

I agree with the emphasis on more and smaller banks, but the Keynesian part I don't get. Presumably, businesses need to borrow, as do individuals, so taking care that loans are available is not a trivial problem. The other emphasis seems like a stimulus, which is a way to deal with any downturn, but that isn't peculiar to this problem, while the banking crisis is. Maybe I'll try and find this paper.

"The financial system, meanwhile, can be managed much as it was during the Depression, with regulators weeding out doomed banks and closing them, putting troubled banks under conservatorship and supervising healthy ones closely to prevent excesses. "If we are going to leave insolvent institutions open, it is critically important to replace or at least control management," the Levy paper explains. "Business as usual would be a disaster."

This I agree with.

"Under these conditions, the government can grant forbearance and prescribe business plans for a slower recovery of bank balance sheets. Instead of buying ruined assets from banks, the government can allow them to sit, possibly for several years, until the economy revives and mortgages or other debt paper regains value. This would amount to an "imposed purgatory" for major banks, keeping them from growing too fast with unsound ventures. Taxpayers will not get off the hook either; government will need to spend hundreds of billions to bail out bankrupt pension funds and pay off insured deposits at failed banks. "

I'm okay with that, except that I would make them private again as soon as possible. The government running banks in the long run I don't approve of, although the idea offered of a small one to seed competition doesn't bother me as much.

"Economic stimulus requires preservative measures to stop the bleeding, like a moratorium on home foreclosures and federal lending to the auto industry, as well as force-feeding innovation. Like the financial sector, the reform imperatives must accompany any aid for troubled industries. Do not subsidize more bad behavior by corporate titans or assist companies shipping US jobs and production overseas. In Detroit's case, Washington better get it in writing--an enforceable contract to recover our money if the auto industry doesn't deliver."

So, he says:

1) Moratorium on home foreclosures ( Don't agree. We need to get through this. I would support aggressive negotiations to refinance loans that most borrowers could afford, but that's complicated as hell in some cases, although not impossible. That's a PR spin from the servicers and lenders to get a better deal from the government )
2) Auto bailout I'm for, with very onerous terms
3) I don't see the point of subsidizing foreign jobs, so I'm not sure what he means. Does he mean that the money can only be used in the U.S.?
4) He's correct about the getting in writing

"President-elect Obama, of course, cannot act directly on any of these matters before January 20. But the Democratic Congress can, since the Treasury cannot spend any of the next $350 billion in the bailout fund without Congressional approval. Congress's first task is to cut off Paulson's water. Representative Dennis Kucinich, as usual, is out front demanding that Congress reject Paulson's request in advance. You can see why Wall Street hates these propositions. No more free money from Washington. No more "masters of the universe." You can also see why the people might be delighted. "

Let's not get carried away, we've got some heavy lifting to go,but, at this point, a good deal on anything would be delightful, if unanticipated.