Centerblue.org

Obama’s stimulus plan is ambitious, but it won’t be enough to get us out of the economic cesspool we’re in. It only addresses one of three areas of concern that absolutely have to be addressed in order for the economy to recover:

1) Nationalize the banks. Heaven forbid Americans should talk about nationalization! But the bottom line is that the major American banks are insolvent, and nobody wants to admit it. They’re carrying trillions of dollars in bad assets on their books, far more than we could ever throw money at through TARP. These banks made huge mistakes, and now they have to pay. If we keep propping up these zombie dead banks we’ll repeat Japan’s mistakes and stagnate for over a decade, because they’ll be in no condition to get credit flowing again. The government must take over these banks, wipe out every last shareholder, make the bondholders the owners of remaining assets, wipe the balance sheet clean, and ultimately re-privatize them. It has been done before, in Sweden in the ’90’s, to great effect. According to economist Nouriel Roubini the re-privatization could take place in as little as six months. We don’t even need to look to Sweden, we did something similar with Indymac recently–the FDIC took it over and recently re-sold it to private investors. Obama is obfuscating when he says we’re not like Sweden because we have thousands of banks–it’s the few huge banks at the top that are having the most trouble. Stop dithering, Obama–and just get it done!

2) Stop the foreclosures. The economy won’t improve until you stanch the bleeding at the source: people being tossed out of their houses by the millions. Obama recently revealed a foreclosure plan that would provide aid to some homeowners, which raised a huge hue and cry that financially responsible people will be subsidizing the houses of people who took out more mortgage than they could afford. It’s a fair argument–but let’s save the moral hazard arguments for BEFORE the crisis occurs, not DURING it when the rest of us are being shellacked in the stock market and elsewhere because of others’ bad housing choices. But there’s a better way to do this than just giving out money to homeowners: make them declare bankruptcy, and give bankruptcy judges the power to modify existing mortgages down to current market value rather than the ridiculous prices of a couple of years ago–thus letting people stay in their more affordable homes. So instead of people subsidizing others through taxes, they’ll subsidize them through house equity–because if your neighbor’s $450,000 house value just got knocked down by a judge to $100,000 and is later sold at that price, guess what your house is going to be worth. People and the banks can scream and shout and throw tantrums about these adjustments, but the bottom line is that houses were never worth the outrageous prices, and the quicker we bring them in line with their true value the sooner the economy will recover. Painful medicine, folks…

3) Stimulus. Only after these steps are taken can the stimulus plan really work and let the economy gain traction. It will provide jobs that people can use to stay in homes they can afford, bought with credit available from revitalized banks.

Failure to do this is like trying to do cardiac resuscitation on a dead patient–you may get a blip or two in response to the shock, but the corpse goes right back to its lifeless state as soon as the stimulus ends. That’s what’s in store for the economy, and Obama’s presidency, unless he gets it right.

I still have faith that he can.