Obama on Nationalization

As Paul Krugman notes, there are too many narratives for the Obama administration's bank policy. That there is more than one narrative is a sign of confusion and lack of clarity. The obvious plan, to a preponderance of economists, is to put the bad banks into some form of receivership, clean them up, and then sell them back to the public. That the Obama administration doesn't pursue this route is perplexing, especially given the convoluted plan (the Geithner plan) that is being follow instead.

Given a clear and precise path, why doesn't Obama choose it (add your favorite theory here and this is why there are so many narratives)? Obama addressed this question in a speech at Georgetown University:

Now, on the other hand, there have been some who don't dispute that we need to shore up the banking system, but they suggest that we've been too timid in how we go about it. This is essentially the nationalization argument that some of you may have heard.

And the argument says that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure -- my administration's failure to do so is yet another example of Washington coddling Wall Street.

OBAMA: "Why aren't you tougher on the banks?"

So let me be clear: The reason we have not taken this step has nothing to do with any ideological or political judgment we've made about government involvement in banks. It's certainly not because of any concern we have for the management and shareholders whose actions helped to cause this mess.

Rather, it's because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it's more likely to undermine than create confidence.

Governments should practice the same principle as doctors: First, do no harm. So rest assured, we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy.

The gist of Obama's argument against nationalization is to save taxpayers money and to avoid systemic risk. The problem is that it isn't bought by some of the big name economists, for good reasons. When you look at successful resolutions to similar economic/banking crisis in other countries, nowhere do you find anything resembling the Geithner plan. So the prominent economists have continued, even escalated, their dissent:

Bring In The Antitrust Division (On Banking) - Simon Johnson at Baseline Scenario

Ruminations on banking - Willem Buiter at FT

Stiglitz Says White House Ties to Wall Street Doom Bank Rescue - Joseph Stiglitz at Bloomberg