The Politics of the Geithner Plan

Treasury Secretary Tim Geithner has announced his long awaited bank rescue plan and the early reviews are less than glowing. No one seems to like it. [update: well, apparently Wall Street like the plan. Not sure if that's good or bad.]

Under normal circumstances, I would take that as a sign that the plan is a pretty bad one. But these are not normal circumstances. The cacophony of criticism being leveled at the plan is somewhat deceptive in that much of it (i.e. nearly all of it coming from the right) is just Malkin-esque know-nothingism. The "tea party" crowd doesn't have any idea how to solve the financial crisis, and they don't really care either. They are either in serious denial about the magnitude of the problem or they realize that no one is listening to them anyway, so they might as well just be outraged by everything and let the adults make the hard decisions.

Over at the adult table, the primary criticism of the Geithner plan seems to be that it is unlikely to do enough to fix the problem, that nationalization of the banks is the only real solution we have left. Paul Krugman is firmly in this camp, as are a number of other intelligent economists with good track records on these issues. My sense from reading Krugman's column and various posts about the Geithner plan, however, is that his primary concern is that if we adopt the Geithner plan--which he sees as unlikely to work--it will somehow foreclose any chance of pursuing a Swedish style nationalization plan down the road ("by the time Mr. Obama realizes that he needs to change course, his political capital may be gone"). In other words, we only get one shot at this, so we better do it right.

I wouldn't for a second presume to take issue with Krugman's economic analysis (I'm just a lawyer), but to the extent his opinion is based on his assessment of the current political climate, I think he's probably wrong. Saving the financial system isn't like enacting health care reform. With something like health care, you may only get one shot. If the public sours on your idea, they have the status quo to fall back on and the odds are that nothing will get passed. But if the Geithner plan doesn't work, the financial system is still going to need rescuing and nobody is going to be content to do nothing. Obama would likely pay a price politically, but everyone would still be clamoring for him to do whatever it takes to save the economy. And nationalization would be the obvious next option.

Which brings me to the second flaw I see in Krugman's analysis. Implicit in his criticism is the notion that nationalization (i.e. the Swedish model) is currently a politically viable option. I'm not at all sure that's the case. Presumably Congress's authorization would be required to embark on such an endeavor, and it's hard to see how such a proposal would get through the Senate. It may be that, as a political matter, we need to try something along the lines of the Geithner plan before we take the next step.

So what I'd be interested in seeing from Krugman and others is some analysis of what, from an economic perspective, we're risking by trying the Geithner approach first. In other words, putting aside your assessment of the country's political will, is there anything about the Geithner plan that would foreclose the possibility of successfully executing a Swedish-style nationalization down the road? Or put yet another way, from an economic perspective, what is the opportunity cost of pursuing the Geithner plan? Does nationalize have to happen right now in order to work?
UPDATE: Kevin Drum and I seem to be on the same page on this one.

UPDATE II: Along the same lines, one of the political problems that proponents of nationalization seem to be underestimating is how difficult it would be for the Obama administration to lobby hard for a nationalization bill without sending the financial system into chaos. Those who argue for nationalization do so by pointing out how bad the current situation is. They argue that many of our banks are in much worse shape than they are letting on, that they are essentially "zombie banks" that are massively insolvent if their assets are properly valued. That may well be true, but it's one thing for Paul Krugman to say that and quite another for President Obama and the Treasury Secretary to say that. The Obama administration has to be concerned that if they make the arguments necessary to win the public debate on a proposed nationalization bill, they could erode whatever public confidence still remains in the banking system, thereby exacerbating the problem and making it look as if they triggered it. This is always the Catch 22 with problems like these. If you are brutally honest in your diagnosis of the problem, you can actually make the problem much worse.

It seems to me that trying to "sell" Congress on a nationalization plan, at least without first attempting all other reasonable options, is an inherently risky proposition. It could trigger panic. And even if that panic was inevitable, there's a real risk that you end up getting blamed for the consequences. That would truly erode your political capital. You might get your nationalization bill, but forget about anything else.