Beyond Ideology into the Brave New World

Nouriel Roubini is an Iranian Jew who teaches business at the Stern School at New York University.  From this paucity of facts, that Mr. Roubini, an Iranian Jew, is (a) alive and (b) someone who continues to thrive, we can deduce, in the manner of Sherlock, that he must be an adaptable, savvy and insightful individual.  

On the cable news financial channels, such as CNBC and Bloomberg, he is usually greeted on his occasional guest appearances with all the enthusiasm of the Plague at the costume ball  in Edgar Allen Poe's "The Masque of the Red Death."  He has earned the sobriquet Dr. Doom because of his relentlessly downbeat assessments of the American economy.  He is hurried on and hurried off, appearing only long enough to bum everybody out.  As soon as his spot is over, the regular shills for the financial industry begin bad-mouthing him, and quickly bring on a more reliable cheerleader who talks about a "bottom" having been reached in the Dow and that it's time for John Q. Public to go long on American stocks once again.

Nouriel is a major irritant because he's always right.  He was writing in detail about the bursting of the housing bubble and the tsunami of bad debts that would overwhelm the banking sector about three years ago.  He was steadfast in pointing out that the figures used for subprime losses (originally estimated at maybe $200 billion) were vastly understated.  His own current estimate of the total eventual loss, worldwide, from bad U.S. mortgage debt is $3.6 trillion, about half of which will hammer American banks directly.  With $1.8 trillion in losses, the U.S. banking system is insolvent.  As a result, Mr. Roubini argued yesterday in the Washington Post that the major insolvent banks (Citigroup, Bank of America will no doubt be among them) should be nationalized.

As the amount of bailout money continues to pile up toward the ionosphere, one must admit that Prof. Roubini has a valid point.  There will be no end to the shoveling of "taxpayer" money into the open maw of these insolvent, imprudent, incompetent banks.  Just take them over so the People have direct control.  The bankrupt banks have lost the right to control their own destinies. A lot of support is lining up behind Dr. Doom, and some rather surprising (at first glance) opposition is also taking shape.  

As one prominent example, Barack Obama prefers that the banking system remain in private hands.  One has to wonder: is this a practical decision or an ideological one?  One can understand the reluctance to turn over the banking industry to a deliberative body as thoroughly, irretrievably corrupt and incompetent as the U.S. Congress.  These are the fools who have managed to wreck the Social Security system by burning through its trust fund.  They are as bad as those corporate greed-heads who have run the banks into the ground. Still, nationalization simplifies the role of Congress.  Congress simply has to appropriate the money, and then it can use lawyers to work out the details of acquisition and hire people from the private sector to run the federal bank. Congress can probably handle that; what it can't handle is coming up with a complex solution to guiding and solidifying the banks while they remain in the control of existing management.  That's way past its skill level.

If the banks under private management, despite the coal-tender approach of shoveling money into the corporate furnaces, become officially, recognizably insolvent, then all hell is going to break loose.  That should probably be the operating principle of the Obama Administration: do those things, and only those things, which avoid all hell breaking loose.  We don't want bank runs, we don't want everyone stashing their cash in mattresses, we don't want a bankrupt FDIC.  If the banks are stabilized by taking them over, then we know how much it's going to cost.  Indeed, Dr. Doom has already told us.  We need a couple of tril.

The question then becomes where to get all this money.  Again, simple ways are best.  We'll be borrowing it, and the most likely place to come up with all the money necessary for this (bad-idea) stimulus and the bank acquisition and liquidity "injection" is through a meltdown of the American equities markets. I imagine this will happen on its own as the American economy continues its inexorable contraction.  The Dow to 2,000, the NASDAQ to 20 or so, the Standard & Poor to very poor indeed.  The cash coming out of these corporate yard sales can be funneled into the investment of last resort, U.S. Treasurys (that's the plural spelling the Serious guys use, I've noticed).  So we'll have the cash and the most boring financial market since the USSR, circa 1955. Those who have money to invest can buy Treasurys; those who need to borrow can borrow money from the federal bank.  The interest rates should be set to earn a little for the federal government; say 5% interest paid, 6% loan rate.

There is a name for this kind of arrangement, of course.  In essence, it's a credit union.  Other vital industries, such as car manufacturing (re-tooled to produce mass transit and electric cars), can also be nationalized, now that we see that GM and Chrysler simply present the same problems as the banks.  Buy them, don't throw money at them.

I can see where Barack Obama would resist a lot of this.  He thought he was going to be President of the United States, not General Secretary of some American socialist state.  Still, we'd better get real.  As a friend always includes with her notes: Reality is that thing, even when you don't believe it, refuses to go away. To avoid truly unimaginable social dislocation, President Obama needs to avoid ideological hair-splitting and focus simply on things that will keep the immense, clumsy, faltering American system from total collapse.