The New York Times is reporting that the financial rescue plan to be unveiled by the tax cheat aka “Treasury Secretary” Tim Geithner tomorrow emerged after a bruising battle against “populists” who wanted greater government control over the insolvent banking system in return for government cash.
The real story is more likely that the Obama team is in much deeper than they are willing to admit publicly. Naked Capitalism reports that Martin Wolf of the Financial Times is saying that the banks are indeed insolvent and that it is Obama’s timidity that is operative in Washington, not some kind of rational fending off of senseless left wing populism. Wolf was interviewed here and here by Tech Ticker’s Henry Blodgett.
Why does nationalization make sense rather than some kind of cobbled together Rube Goldberg machine? Because any attempt to buy the banks’ toxic assets either by the private sector or a giant “bad” bank means anything left over gets marked down to its actual value pushing the banks’ into actual insolvency. Only if the government is on both sides of the trade, so to speak, is that result avoided.
As Wolf makes clear this is not a liquidity crisis but a result of the massive explosion of what are now fundamentally worthless securities, including asset backed financial instruments and the associated massive amount of credit default swaps. The billions of dollars worth of synthetic CDO’s created out of these two elements over the last few years, as I have suggested, are worth no more than yesterday’s losing lottery tickets. They can only be torn up and left on the floor to be swept out in tomorrow’s trash.
That means, of course, that many banks still in private hands begging for a cash infusion must be shut down. A six month to one year nationalization and reorganization process under transparent and democratic control by public trustees is the only way forward.
Obama makes the mistake of the Presidential newbie – he thinks it will get better if he only stays the course, when, in fact, it will only get worse. If he is not careful, this crisis will become an albatross hanging on his Administration – not unlike what Vietnam became for Nixon.