Dithering

Paul Krugman is very worried about the Obama administration's indecision about saving failing financial institutions.  We risk, he says, going deep into long recession (I'd call that depression).

Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade." Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds.

What's really needed is better management of the situation within banks.  But the moment there's the slightest hint of a bank being "taken over" by  the government, the word "nationalization" scares people away.  This is a surefire way of making sure Obama "fails."  Meanwhile, Krugman argues, "officials still aren’t willing to face the facts."

They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.

Financial reporter, Adam Davidson, at NPR seems to think government intervention is inevitable.  What the administration is afraid of doing is openly nationalizing, setting off international panic, not to mention a huge political outcry.  So it's a matter of finding a more subtle way of -- shhh -- nationalizing while avoiding the appearance of ownership in part or in whole. 

Administration officials won't discuss nationalization, even off the record, for fear of setting off a global bank run, Davidson says. One independent analyst he has interviewed, Sean West of Eurasia Group, says the administration's stress tests for banks have created a situation where struggling financial firms can nationalize themselves. If Treasury's stress tests show a bank is in trouble, the bank can ask the government to step in.

"The net effect, rather than actually talking in language of nationalization, it's really [that] we're looking at the government has opened the door to increasing ownership of these banks," West says.

West's scenario, of increasing government intervention, has gotten a preview with large institutions like Citigroup.... If a stress test shows the bank is in trouble, the bank can ask for a capital injection from the government.

Davidson says, "It's not the Obama administration coming out and saying things that would anger Democrats and Republicans and many others. It's the banks saying, 'Hey, we need this,' which gives the Obama administration tremendous cover."