Are Obama's plans optimistic? Nationalize the banks?

Thanks to Gus for sending us information about Obama's plan for reigning in the deficit. However, I'm afraid that worse times lie ahead, which will make Obama's optimistic plans look downright silly, unless we take much more drastic action to address the banking and financial crisis.

Economists of all persuastions and from different countries appear to be reaching a consensus, which reads as follows: The situation is getting dramatically worse, even more rapidly and to a degree that is taking even pessimistic analysts by surprise. (I don't like the catastrophic tone of the following, but the authors have been correct morst of the times since I've been reading them, so it's wortk seeing what they have to say:
http://us.f806.mail.yahoo.com/dc/launch?freeacct=1)

A consensus is also forming around the idea the nationalization of insolvent US banks is inevitable. (See Krugman's piece in today's NYT: http://www.nytimes.com/2009/02/23/opinion/23krugman.html?_r=1&em). Krugman is a self-proclaimed liberal, so some people may discount his opinions. My perusal of other sources, however, confirms that nationalization is now considered inevitable by experts of all stripes.

I will borrow Martin Wolf's words to convey the gravity of the situation, while reminding people that he is a prudent, moderate, keep-your-cool British economist. What he's saying is therefore even more worrisome:

"We are living on the cusp of history. The priority is to reverse the downward spiral of despair through overwhelming and concerted action. That will only occur if the US now gives the leadership we need. Mr Obama may even find, as many presidents have found before him, that leading the world is easier and more rewarding than cajoling a recalcitrant Congress. This may not be the challenge he expected. But it is the challenge he confronts. History will judge his presidency on whether he dares to succeed."
http://www.ft.com/cms/s/0/4a44f222-f221-11dd-9678-0000779fd2ac.html

You can read more about his take on crisis if you click on the following link.
http://www.ft.com/cms/s/0/9ebea1b8-f794-11dd-81f7-000077b07658.html

Another vote in favor of nationalization comes from Gerard Caprio, Professor of Economics at Williams College, chair of the Center for Development Economics at Williams College and a former director of financial sector policy at the World Bank:
http://blogs.ft.com/economistsforum/2009/02/us-bad-banks-and-bad-plans-why-capitalism-requires-nationalisation/

Caprio also quotes Dominique Strauss-Kahn, President of the IMF, who insists that nationalization, disposal of insolvent banks, wiping out of shareholders, and sale of the cleaned-up institutions to new private owners is the only way to go. This is what the US preached to countries all over the world when a financial crisis hit them. We may have no choice but take a dose of our own medicine. Strauss-Kahn also insists on the need for a coordinated global response.

"A coordinated global response was needed to contain the crisis. "We saw in 2008 that piecemeal responses are not enough. This does not mean that all countries should do the same things, or that there is a "one size fits all" solution. But policy responses have to take into account the interconnectedness of national economies, and the fact that decisions taken in one country can have profound effects on others."
http://www.imf.org/external/pubs/ft/survey/so/2009/NEW020709A.htm

And here comes news about proposals from the EU, usually vilified or ignored in the American press. We may agree or disagree, like or dislike the EU, but they are the only other Behemoth in the global economy, at least the only one we can really coordinate our policies with (China is a universe onto itself, and right not it's in trouble too, more than people think).

Here is one piece on EU proposals for the G20 meeting which will take place in April.
http://www.ft.com/cms/s/0/a896e59e-011f-11de-8f6e-000077b07658.html

And the followint piece is about the precarious state of central European countries and the need to bring them into the EU even more -- something that doesn't find me enthusiastic, given their attitude toward the Union even after they joined, but something that must be done, whether we like it or not. That's what Wolfgang Munchau is proposing.

"The second policy error is directly related to the first. The new EU members treated eurozone membership as a voluntary policy choice. This is a misinterpretation of their own accession treaties. When they signed up to EU membership, they signed up to the euro as well. Only the UK and Denmark have a legal opt-out. Of course, as newly industrialised economies, they were not under an obligation to join immediately, but they were under an obligation to conduct policies consistent with eventual membership. If they had pursued such policies, they would almost all be members by now. Slovenia and Slovakia have demonstrated that, given the right policies, it was possible to enter the eurozone early on. Both these countries are now safe. For the others, the decision to procrastinate turned out to be a financial stability disaster. If confronted with a crisis such as this, you do not want to be a small open economy, on the fringes of the eurozone, with an irrelevant currency and lots of Swiss franc mortgages....

In my view, the smartest answer to the prospect of meltdown is the adoption of the euro as quickly as possible. There is no need to switch over tomorrow. All we need tomorrow is a credible and firm accession strategy – one for each country – which would include a firm membership date and a conversion rate, backed up by credible policies."http://www.ft.com/cms/s/0/06a45f2a-0118-11de-8f6e-000077b07658.html

I can't say these are enjoyable readings, but I think they are useful.