Economic Armageddon: Beyond Thunderdome

So Treasury Secretary Tim Geithner has laid out a Public-Private Partnership Investment Program to deal with bad banks assets, which, he explains here, "will set up funds to provide a market for the legacy loans and securities that currently burden the financial system" by "purchas[ing] real-estate related loans from banks and securities from the broader markets," allowing banks to "sell pools of loans to dedicated funds" and investors to "participate in those funds and take advantage of the financing provided by the government."

I'm no economic genius, and that didn't even sound to me like it's in the same galaxy as a good idea. But, not being an economic genius, I didn't want to rely on my dubious powers of evaluation, so I headed over to read Krugman's column, and I got as far as the headline before my fears were confirmed: "Financial Policy Despair."

Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they're doing.

It's as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

The administration's inexplicable unwavering belief that, as Krugman says, "the banks are fundamentally sound and that bankers know what they're doing," to which I'd also add and care about something beyond their own personal interests, reminds me of Obama's pathological insistence that bipartisanship is a valuable objective, despite every sign that the other party is not dealing in good faith.

Obama quite obviously believes that all people are fundamentally decent and, if you expect them to behave decently, they will. It's a hopefulness and optimism I admire, and I quite genuinely believe it's a good starting point from which to begin negotiations with anyone on an individual basis. But it's a crackpot approach for dealing with intrinsically corrupt institutions who have repeatedly proven they are motivated by avarice and spite.

The entire premise on which this plan rests is inherently flawed. The big players in the financial system and the rest of the American people have utterly disparate motivations. The wildly tone-deaf disconnect exemplified over and over by the institutions now in need of rescue should, by now, have illustrated their intractable unwillingness to even get on the learning curve, no less start learning and curving.

And because they operate with no small amount of abject stupidity in addition to their greed and insolence, I cannot imagine on what basis, besides a totally unsubstantiated hopefulness, Obama and Geithner can argue they have a reasonable expectation that the banks will achieve the requisite alignment with the citizenry's needs for this scheme to work.

And, beyond what I consider the innate philosophical flaw, there are other problems with the plan, which the estimable Krugman lays out for us here and here.