Full Frontal Nationalization

The stimulus bill is out of the gates and the money will start flowing in the next few months. Count me in the Krugman camp . I think the bill was inadequate in size but it will go part of the way to plug the projected GDP gap and stave off unemployment.

The State of Ohio already has a web portal set up to start accepting project requests from interested parties. Visitors to the site are reminded that anticipated demand for dollars will well exceed the supply. What's interesting is that the State portal has no verification requirement for submitters. Anyone can make up a request and submit it on the website.

The Bailout Spectrum

Using government spending to increase employment was a straightforward approach to attacking the economic crisis. The financial system woes are not as easy to tackle. The focus of the Obama economic team (Geithner, Summers, Roemer et al) will be the ailing banking system. By banking I mean any financial institution but certainly the 18 or so money center banks in the hot seat.

As I see things the range of solutions can be viewed along a Bailout Spectrum. At one end of the continuum is doing nothing or tough love. Kind of like the market fundamentalists having their way.

Let nature take its course. No capital infusions, no buying toxic waste off the balance sheets no TARP no mercy. The taxpayer fronts nothing to prop up the banks and the whole system is left to rot on the vine. The only problem is that taxpayers, the government and everything will be along for the ride. There is no decoupling from the financial system.

The middle of the spectrum is populated by ideas that we've already employed. The original TARP plan to buy assets from banks resides here. The actions taken with the first round of $350 billion that Hank Paulson oversaw. This included the injection of equity and partial taxpayer stake in large institutions and the hundred billion dollar backstops placed behind pools of crappy assets. All these attempts reside in the lukewarm area of the spectrum.

Moving further down the road we have the unveiled by a sheepish Tim Geithner last week. This plan laid out more asset guarantees, more room for capital injections using convertible shares and a public private vehicle for purchasing more bad assets. The current plan is more a less a back door variety of nationalizing.

The perception is that the government control is less direct if the methods are more opaque. These tactics have been tried to some degree and there's no indication that they will get the system back on its feet anytime soon.

What the Geithner plan in its purported form would do is prevent a rapid move to nationalize the banks. A move that the Obama administration may not view with alacrity at first but the reality on the ground will force a change

Full Frontal Nationalization

The opposite end of the spectrum is full frontal nationalization. The government and the taxpayer gets the bank, the assets and most of the upside. This option is viewed as taboo in a supposed free market society like the U.S.

We're all bankers now. There is a wave of sentiment building for the nationalization strategy. Simon Johnson, Paul Krugman, Nouriel Roubin i and other economists have been pressing the issue for weeks now. The latest entrants into the nationalize are - GOP members of Congress . It's gotten so bad that the party of free market devotion is throwing in the towel.

Call nationalization something else like preprivatization or bank reincarnation to make it more palatable to Wall Street. The key thing is to get through this tough period and begin restoring the confidence and efficacy of the banking system. The full frontal approach also provides plenty of control and upside for chief investor the taxpayer. So what if we do something not viewed with love by Friedmanites of the world.

If you're not convinced read this"ransom" note from a large bank to the American taxpayer that was discussed on NPR's Planet Money.