Bankrupt Bailout

Let us hope President Obama has asked his economic advisers if they have a Plan B--because Plan A failed as soon as Treasury Secretary Tim Geithner announced the details. Geithner's speech was supposed to be a fresh start for restoring investor confidence and directing capital to deeply injured banks. Instead, it was a rhetorical catastrophe for the Obama administration. As Geithner spoke, financial markets plummeted; the Dow Jones slid nearly 400 points. Markets aren't always a trustworthy measure of policy, but in this case the skepticism was justified. Treasury's so-called "financial stability" plan is a warmed-over mishmash that answers none of the crucial questions about how to resolve the crisis, and it leaves out virtually every meaningful fact. When public officials are that evasive, it usually means they don't know what they're doing--or, more likely, they are trying to fog over their true intentions.

What are they hiding? If Geithner had spoken with any clarity, he would have revealed that his "new" plan is basically a continuation of the one that failed spectacularly in the closing months of the Bush administration: Washington intends to deliver vast additional sums of public money to the very largest banks while demanding little in return for the public interest. The Obama administration is adding new wrinkles to a doomed effort, attempting to put Humpty Dumpty back together again. Since the old order led the country into this mess, enlarging its rescue package is certain to stoke further the ferocious public outrage. So Geithner cannot say plainly what he is up to. Neither he nor Larry Summers, Obama's chief economic adviser, can think his way out of the problem or propose a more aggressive approach, as both men are wedded to the old way of doing things.

The predicament is now deeply threatening to our new president; very swiftly he will own the disaster he inherited. We urge Obama to launch an entirely different approach. The fundamental, terrifying fact of this crisis, widely understood among experts and cautious investors, is that many of our largest financial institutions are insolvent. It is not in the public interest to exhaust the Treasury trying to keep them alive.

The more promising path is for government to take charge of the system. This approach--call it "supervised workouts" if "nationalization" sounds too scary--would be more efficient than handing over more billions to failed bank executives and asking them to do the right thing. The government should liquidate the troubled big banks (along with the arcane financial instruments that led to their downfall), sell off their parts to healthier enterprises and let the shareholders eat the dust. Scarce public capital can meanwhile be used to fashion a new banking system, built around the thousands of smaller banks and financial firms that respect their obligations to the broader economy by investing in production and jobs. It will take some years to do this, and government will temporarily have to fill in the blank spots in the credit system that are not functioning, but it's probably the only way out.

In some ways, Obama did this to himself. Ignoring the pleas of skeptics and reformers (The Nation included), the president surrounded himself with familiar players from the old order and rigorously excluded anyone identified as an unorthodox thinker. It is not too late to correct this deformity, but he can't wait long. The White House needs a healthier mix of ideas and advisers--people who are not committed to saving old Wall Street names but are capable of visualizing a brighter future emerging from the ruins. Look around, Mr. President. You can find them.

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