GOOD NEWS/BAD NEWS GEITHNER.

Via Noam, a Daily Beast article by Adam Posen brings the criticism on Tim Geithner:

I know that the very same self-limiting discussions took place at Okurasho, the Japanese Ministry of Finance circa 1995-1998. And they ended with the same result, a series of bank-recapitalization plans that tried to mobilize private-sector monies and overpay for distressed bank assets without forcing the banks to truly write off the losses. Even though the top Japanese technocrats at the ministry were even more insulated from a weak Diet than the congressionally unconfirmed advisers currently running economic policy for the Obama administration, they did worse. Whatever the political context, countries usually try to end banking crises on the cheap, with a limited public role at first, overpaying for distressed assets and failing to change banks’ behavior, only to have to go back in a couple of years later.

So the bad news is that Posen doesn't think this will work, but the good news is that we are way ahead of the Japan curve; Japan's crisis began in the late eighties, while ours began in 2007, and was only broadly recognized last year. So the fact that the U.S. is already moving faster than Japan is a good sign; if Posen is right and it doesn't work, more agressive plans will come to the fore faster than in other crises. Like Justin Fox, I'm not sure why this critics of the administration's plan can't put it in perspective:

Krugman, Simon Johnson and a lot of other people think the government should be moving a lot more quickly and decisively to take over the most troubled banks and clean up their balance sheets. The Treasury approach appears to be to do some work on the balance sheets—through efforts to modify mortgages and buy up toxic assets—and then figure out what to do with the most troubled banking companies.

Strategically, if you're an economist who believes that speedy nationalization is the only way out, you're wasting your time talking to the administration. Instead, you ought to be building a constituentcy for that policy in congress, since the only way seizure and reorganization will happen is with new legal authority from congress and a very large check. Berating the administration for not having $1.5 trillion to spend or the ability to seize banks is a nice side-show, but it's nothing compared to having a few leading members of congress stand up and say, "I'd vote for nationalization and the costs that go with it."

-- Tim Fernholz