The hole in Obama's grand ambitions

Since Obama unveiled his ambitious budget last week, Republicans have embraced the farcical meme that the president is a socialist. The charges are yet more evidence the GOP is taking an appallingly unserious approach to the current economic crisis. In fact, what worries me most about the president is not his expansion of government, but the surprisingly timid government intervention in one key area: the banking collapse.

Back in mid-February, Treasury Secretary Geithner unveiled the administration's much anticipated plan for rescuing banks. The markets promptly dropped nearly 400 points and the plan was panned far-and-wide as too vague. Fast-forward three weeks and even greater wreckage on Wall Street and it seems the Obama Administration is not much closer to a solution, as Paul Krugman points out in his column today:

The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.

Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Krugman goes on to say the feds latest plan -- offering low-interest loans to private investors willing to snap up the bank's stinking assets -- is politically DOA. Congress would never release trillions to insure the investments of hedge fund managers and the like, who helped push us toward the economic abyss. It's hard to argue there. Meanwhile, Citigroup's stock closed at a paltry $1.02 yesterday. Temporary nationalization is beginning to look like a better strategy as The New Republic points out in its latest cover story:

Perhaps the boldest of the available options is temporary government ownership, loosely known as nationalization. Economists from Paul Krugman and Joe Stiglitz to Alan Greenspan have converged on this course, and the markets--or at least bank shareholders--are beginning to anticipate it. But Geithner has been even less keen on nationalization than the alternatives, telling Jim Lehrer it's "the wrong strategy for the country." Has the Treasury secretary suddenly lost his nerve?

That last question is the key. Of course, nationalization opens a whole new set of thorny policy issues surrounding the feds control of major banks, not to mention the political fallout (maybe the GOP can replace its "socialist" howls with "communist" ones). But it's become clear bold action is needed, as Obama himself called for a little while back. What's interesting is Obama's timidity on the bank bailout stands in striking contrast to his sweeping program to reform healthcare, energy, and education. And here, I think, lies the rub: fixing the banking crisis is key to the health of the economy because lending is the lifeblood of capitalism. The health of the economy is key to implementing his agenda. By not proposing a forward-looking solution to the banking crisis, Obama is risking all of his grand plans.