Nobel Economists vs. Geithner

Another winner of the Nobel Prize in economics, and a former Clinton White House adviser, joins Paul Krugman today in turning thumbs down on the Treasury's public-private toxic asset plan and suggests that nationalizing banks would be "preferable."

Joseph Stiglitz concludes: "Some Americans are afraid that the government might temporarily 'nationalize' the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

"What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a 'partnership' in which one partner robs the other. And such partnerships--with the private sector in control--have perverse incentives, worse even than the ones that got us into the mess."

Stiglitz's denunciation of the Public-Private Asset Plan as "a win-win-lose proposal: the banks win, investors win--and taxpayers lose" follows Krugman's observation last week that "it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic."

Not only do we have two Nobel Prize economists trashing the proposal but even the radicals at the Wall Street Journal are unhappy that the trough for investors may be too small:

"So not only is the government going to be anointing a favored few to invest in these assets. It is also giving those favored few the opportunity to collect fees and profit-sharing from anyone else that wants to go in with them. In the wake of the AIG bonfire, Mr. Geithner is tempting another outcry."

Unlike those AIG bonuses, the toxic-asset plan is too complex for "another outcry" by politicians or the public, but in the amounts of taxpayer money involved, it dwarfs that issue.

Even worse, it is a key recovery proposal by a President voters want desperately to succeed. But someone in addition to economists and super-investors like George Soros has to put nationalization of banks in some form on the agenda--and soon.