Krugman: Obama Blowing His First and Last Chance to Set the Banking System Right

In the continuing effort to ignore the reality that the Fed/Feds have simply given tens of billions of dollars to AIG's gambling partners, many of whom were foreign bank(ster)s, apparently Sec'y Geithner is going to announce tomorrow rather than next month the administration's plan to give more money away to banks (and therefore to their employees, no matter how much they claim to hate their executives).

Why, I thought over a soy cappuccino, not make this a Krugman morning doubleheader? So, for those who don't have terminal bailout fatigue, here are some comments from his "Conscience of a Liberal" blog from yesterday on this plan, the title of which, for those who would like to read the whole post, is un-confusingly titled "More on the bank plan".

Why was I so quick to condemn the Geithner plan? Because it’s not new; it’s just another version of an idea that keeps coming up and keeps being refuted. It’s basically a thinly disguised version of the same plan Henry Paulson announced way back in September.

So now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?

If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.

But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.

Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.

But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that’s not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls “a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don't think I can finish this on a Times blog (expletive deleted)]”

Why am I so vehement about this? Because I’m afraid that this will be the administration’s only shot — that if the first bank plan is an abject failure, it won’t have the political capital for a second. So it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.

DoctoRx again.

So, not only is Krugman horrified, but he has become one of a growing number of bloggers who are blaming the President himself for policies with which they disagree, rather than using such euphemisms as "Team Obama" or claiming that Obama is being given bad advice.

If Barack Obama's honeymoon did not end with last week's AIG public relations disaster, it may well end tomorrow.

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