Felix Salmon, James Kwak, Brad DeLong, and Mark Thoma had a group chat about the Geithner plan last night which is worth a read. During it, James Kwak asked, "What do you think is the benefit of using private sector as opposed to just the government. The amount of $ is small. Is it the expertise that we are missing? Or political cover? Or something else?" I've increasingly come to the conclusion that we're paying the private market to launder both our current and eventual policies: To ensure that our prices don't carry the taint of government and our eventual judgment of insolvency, if indeed it proves necessary, does not seem the overreach of some bureaucrat. As I've written before, I've few firm conclusions on whether nationalization is necessary. But I'm increasingly convinced that even if it is, we're not ready for it yet. The success of the policy will depend on the technical competence of the regulators and the specific construction of the takeover, but also on the psychological reaction of first the market and then the electorate and then the political system. Priming them is as important as granting the FDIC legal authority. I don't think they're primed. So long as the banks are continuing to assert their solvency and the private investors oppose receivership and the Republicans are advocating absurd policies like spending freezes, it's hard to imagine a swift nationalization being greeted with resigned consensus rather than furious opposition from moneyed interests. And the last thing you want in the immediate aftermath of nationalization is uncertainty about the level of political support and market forbearance. Kwak is right that the pricing function of the market is smaller than the government is suggesting and being compensated at a level that's simply galling. But if the Geithner plan effectively co-opts the market for the next step by using their credibility to set prices and their inability to buy the assets to prove insolvency, then that might prove to have been a good investment indeed. And it's not a wild supposition. This week, the Obama administration will send legislation to Congress asking for the legal authority to nationalize. They may not want to use that authority, but they are certainly readying themselves for a world in which more aggressive intervention is required. The Geithner plan, whether intentionally or unintentionally, fits neatly into such preparations.
