CAN'T BANK VIRTUE.

Yesterday, Matt observed that, though he thinks economic justice would be furthered by nationalization, Geithner's plan could work perfectly and still leave us with the same kind of unsustainable and unproductive financial system we used to have. He follows up today:

My biggest concern about the PPIP approach to the banking system is that even if it works, what it does essentially is return us to the pre-crisis status quo—banks that are so large that they’re too politically powerful to regulate effective and too systemically important to be allowed to fail.

Which raises the question, should the administration try to fundamentally change the character of the financial system, or should it just try to get it running again and worry about sustainability later? James Galbraith, in an article well worth your time, argues that the two are one in the same. But the up-front political and financial costs of the kind of program Galbraith might prefer are probably too much for the U.S. government to face at this time. Perhaps all this talk of populism will provide an opportunity for that kind of agenda, but the administration would probably be happy just to have a functioning, or even semi-functioning, financial system, damn the moral hazard. It could work.

The administration is politically smart to focus on the short-term functionality of the credit markets, but like Matt I do worry that they aren't preparing rhetorically for the kind of regulatory reforms and trust-busting that would create a sustainable system. There needs to be more preparation for the pivot that has to occur after stability has returned. Or, on the other hand, perhaps the PPIP will fail to work, and in so doing reveal that nationalization is the only option left. That would give the administration the ability to fix the banks for both recovery purposes and for long-term economic productivity.

-- Tim Fernholz