Banks: does Obama have a Plan B?
Hard on the heels of Guido's triumph over McBridegate, a US blogger claims to have received the results of the US stress test on 19 major banks.
The test, which is for solvency, is alleged to have found that many of the banks are technically insolvent and could not survive a further downturn, and indeed that if two went down it would wipe out the remaining funds of the Federal Deposit Insurance Corporation, which is being used to provide a credit line to Wall Street.
I'm in the USA at present, getting ready for the red-eye to come back and report the UK budget. The US Treasury has denied the leak, and the blogger's own website contains highly unsavoury language (you can click on the Bloomberg link above to find it but I'm not linking direct from here).
However in Manhattan there are a lot of people who give credence to the idea that Obama will be forced to nationalize a part of the banking sector, and that a surreptitious "Plan B" is being assembled by writers for the New York times, including its Nobel Laureate economics guru Paul Krugman, and Obama advisers.
The Plan B, goes the theory, would have to be sprung as a surprise to avoid an Alistair Darling-style run on the ailing banks. It would have to involve a second tranche of fiscal stimulus and possibly some more decisive move towards the classic quantitative easing strategy being adopted by the Bank of England.
All this, as I've pointed out before, will not be popular with that whole part of America which suspects any role for the state in the economy leads to socialism. However they are currently up in arms about taxpayer dollars being used to bail out Wall Street, and when the terms of any bailout become finalized, it will doubtless enrage them even more.
So Obama finds himself potentially trapped in the same way Bush and Paulson were: between a resurgent liberal left wing calling for decisive state intervention and a rightwing plebeian base calling for any bailout to be at the expense of the bankers not the taxpayer: since Bernanke, Geithner and Obama are committed to paying over the odds for the toxic debt, their current plan ensures the taxpayer loses.
It's worth recalling what happened the first time around: the right wing protest paralysed congress for a crucial week in which the financial system headed towards meltdown; then the left ensured the TARP was passed with so many conditions it couldn't meet its original purpose and was abandoned.
The "Plan B" theory would be just liberal Democrat fantasy if it were not for one salient fact: the Obama administration is, five months after his election and three months into the presidency, quite unformed. There is no under-secretary for domestic finance. More important there is a lack of narrative about what they are doing with the banks. Every day seems to bring a new tweak or announcement.
Brad DeLong (sometime Newsnight interlocutor) in his blog speculates on three reasons for this a) the banks have us by the "plums" as Brad graphically puts it b) the government will actually make money but it relies on letting the bankers get rich from the bailout plan c) the bailout plan is just a going through the motions exercise before the banks are nationalized in September.
This is just speculation of course I can tell you from my stay here there is tangible and rising frustration with Obama's statism, which is not just being fuelled by Fox News but which comes from deep within the US psyche and even from people who approve of the president himself.
Meanwhile most of the liberal, Democrat, New York Times reading types I have met will readily agree with Krugman that Obama is close to losing the plot on the banks. To the rest of the world of course he is a saint, (including as I predicted at the New Year, for the rapprochement with Cuba/Venezuela). But here there is political stasis and a lot of media friction.