While the financial sector keeps slowly dragging the rest of us over the cliff, it's clear that our understanding of what must be done has greatly evolved in a short period of time.
This past weekend, both the Times (Joe Nocera) and the Post (guest editorial by Matt Richardson and Nouriel Roubini) published very cogent arguments for a plan for nationalizing the large, insolvent banks, giving even Republicans such as Lindsey Graham a reason to pause and consider that option.
That's progress. Yet since Treasury Secretary Geithner's has yet to clarify the administration's plan, a lot still remains up in the air.
Wall Street is starting to pressure the Obama administration to relax its proposal for a stringent review of the banks' books.
Any indication that administration agrees would be bad news, because that's exactly what needs to be done first -- by now it's clear that whatever the thousands of lobbyists who work for Wall St. propose, we could probably do a lot worse than react by simply doing the opposite.
Ultimately, the onus will fall upon President Obama. His ability to stand up to one of the most powerful industries in the country is crucial. The consequences are so huge and stakes are so high that it could literally make or break his entire presidency.
Let's hope he will remember what he told an audience at Cooper Union back in May, when he talked about his position on regulating finance: "The future cannot be shaped by the best-connected lobbyists with the best record of raising money for campaigns...The details of regulatory reform should be developed through sound analysis and public debate."
All sorts of prominent economists from the IMF to Joseph Stiglitz are pushing for nationalizing insolvent banks sooner rather than later. Obama and Geithner have to be paying attention. Expecially since these voices have laid out in careful terms a practical course of action.
Richardson and Roubini, for example, suggest that the first thing Treasury needs to do is require that the banks undergo "stress tests" before any are deemed eligible to be treated under the rest of the plan.
(Although there won't be time to do a granular analysis of the books, I hope the banks are forced to disclose all of their offshore accounts and derivatives positions and other so-called "toxic" assets).
If that happens, some of the banks will most likely be revealed as insolvent -- after all, if they don't have anything to hide, then why lobby so strenuously against a tough review?
Those insolvent banks, the economists say, would need to be put into receivership (perhaps under the FDIC's supervision). Perhaps they need to be broken up. Perhaps not. Maybe some will need to be restructured under the supervision of a corporate monitor, the way that WorldCom was supervised by former SEC chair Richard Breeden before it was allowed to emerge from bankruptcy (btw, that was one of the first cases where a CEO pay cap was instituted under Breeden's supervision, albeit it was pretty weak). Others will be broken apart, with the valuable assets sold off and the toxic assets piled up in an aggregator bank, the way the FDIC took all the insolvent savings and loans.
If we follow this process and aggregate the toxic assets in one place, there should be less need to cave into the pressure created by the private equity, hedge funds and other vultures to provide them with unnecessary taxpayer-funded financial assistance or a guarantee to cover any losses. We shouldn't have to rush into a fire sale that allows them to run off with valuable assets on the cheap.
(As candidate Obama said at Cooper Union back in May, "a free market was never meant to be a free license to take whatever you can get, however you can get it.")
The Wall St. banks and the hedge funds can all be expected to try to rush this process. Confusion works could work in their favor, and they would not be wrong to suggest that the longer the process drags out, the longer the credit system will stay frozen. Thus, they can be expected to try to take advantage of the growing pain in the real economy to put more pressure on Washington.
Which is why they need a pressure relief valve for Main St. -- i.e. things that stop foreclosures and set up other lifelines. The stimulus will do some of that, and there will have to be more.
Ultimately, the simple fact is that if the Obama administration doesn't organize this process in a rational way that allows it to determine which banks are salvageable and which are insolvent and therefore in need of a full government takeover, it will easily cost us hundreds of billions (trillions?) more than it should have to, as we throw more good money after bad.
An orderly transition is necessary not only to protect taxpayers, but to guarantee that investors will want to come back into our markets.