President Obama appeared last night on ABC's Nightline to discuss with correspondent Terry Moran the administration's positions on both the bank bailout and the stimulus package. The interview provides some insight into Obama's approach to the banking crisis and the calls for nationalization.
Calculated Risk: Obama on Nationalization provides a more in-depth explanation of the challenges facing the Obama administration as it moves forward with its plan to cope with the banking crisis. It’s fairly clear that Obama does understand the complexity of the dilemma, not only from an economic perspective, but as importantly, also from a political perspective. While I’ve been among those who believe Nationalization of the troubled banks is the only solution, I admit that I’ve not been sensitive to the political ramifications of such a drastic move.
It seems pretty obvious that Obama and Geithner also view Nationalization of some of the banks as the eventual and inevitable outcome, thus the inclusion of the "Stress Test" as a key element in Geithner’s proposal. In essence, the "Stress Test" will serve to identify and isolate those institutions which are un-salvageable short of being placed in receivership, thereby building support for such a drastic move.
Roubini’s take is particularly insightful given his strong advocacy of Nationalization, in that he’s tempered his assessment in view of the political realities.
Paul Krugman, on his blog, has adopted a more moderate approach as well, although he hasn’t tacitly approved of Geithner’s proposals. In his entry The Rorschach plan (wonkish, or at least hard to read), Krugman also cites the "Stress Test" as being a particularly valuable tool if properly utilized and implemented. Significantly, he notes:
- Stress test: everything depends on how this is actually implemented. What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that’s a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection.
So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place.
My suspicion is that Obama and Geithner are indeed crafting a Trojan Horse that will ultimately achieve the desired outcome without provoking either an economic or political implosion.