Bad Banks, Worse Choices

The attempt to save the banking system is looking more and more like a suicide mission for the US government as estimates of bad loans rise above $3 trillion.

* Losses may reach $3.6 trillion, according to New York University Professor Nouriel Roubini, who predicted last year’s economic crisis. “If that’s true," he says. "it means the US banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

*At confirmation hearings for the new Treasury Secretary, Sen. Chuck Schumer reveals that Wall Street sources tell him that, if the government wants to clean out all the toxic assets from the financial system, it will cost $3-4 trillion dollars..

*Financier George Soros criticizes the "bad bank" solution of taking troubled assets off balance sheets.

Such measures, he says, would provide "artificial life support for the banks at considerable expense to the taxpayer, but would not put the banks in a position to resume lending at competitive rates."

He argues instead for "partially nationalizing" banks, which "would inflict great pain on a broad segment of the population--not only on bank shareholders but also on the beneficiaries of pension funds" but "would clear the air and restart the economy."

For non-economists, this has the makings of a headache-inducing debate in the coming weeks. When Congressional politicians (pace John Boehner) get into it, there will be a lot of garbage talk about socialism, free markets, tax cuts, etc--all of it beside the point as the financial system teeters at the edge of an abyss.

If President Obama's economic team decides to try for long-range answers rather than Paulsonish quick fixes, it's going to take all his eloquence to get the public and legislative support needed to start on them.

Two Presidents at a Time

As the incoming president introduced his economic team and said there isn't "a minute to waste" in putting them to work, there was a brief, almost ghostly sighting of George W. Bush and Henry Paulson on cable news to promote the Citibank bailout, which Bush said he had discussed with Obama before it was announced.

"My commitment is to do what is required," Obama said at his Chicago news conference today. "President Bush has indicated that he has the same approach, the same attitude."

The President-Elect added that he has asked his new team to consult with Congress, the Bush Administration and the Federal Reserve on economic developments over the next two months.

So much for one president at a time, but the cooperative effort is not going to solve the main problems. The Citibank bailout was needed but drew immediate criticism from economists for being too large. too generous and without adequate supervision.

No matter how hard both Administrations try to deal with it, the two-presidents trap is going to be messy and expensive from now until January 20th.