Susan P. Koniak on Neel Kashkari

Last night Mr. Kashkari appeared on Charlie Rose for the full hour. Anyone who listened carefully would have been disabused of any illusion that the administration has a strategy or is competently managing this crisis. As Elizabeth Warren, Chair of the Congressional Oversight Panel for TARP, repeatedly says there are 3 options for dealing with the banks: 1) open-ended subsidization (and smushing the facts, the strategy Paul Krugman describes as the wait-and-hope-the-banks-heal-themselves strategy); 2) liquidation (Krugman's let-them-fail); or 3) restructuring (what most people, I think, mean when they use the term nationalization--a temporary government takeover, change in management, plan to get the bad assets off the books and reselling healthier banks into private sector).



Obama's Wall St. status-quo team has chosen option one open-ended subsidization without an exit strategy (except hope for an unlikely quick turnaround) and without an energetic, plan for reform that would fix what went wrong. Consider that the Fed and Treasury are intent on restarting the securitization markets without fixing ANYTHING about those instruments (there is much to fix) that makes manipulation of them easy, risk taking likely, and another calamity down the road.

Last night Mr. Kashkari's explanation for why option 3 (restructuring/temporary nationalization) was a non-starter amounted to this: Krugman and everyone else on the "outside"--all those not sitting in my chair or Geithner's or presumably Summer's--cannot possibly understand the "nuances" that make their "simple" solutions so unworkable. What nuances did he mention? Here are some examples: If you nationalize bank A or banks A,B and C, why not D or why wouldn't the market have a run on D fearing they'd be next? If the vague term "nationalization" means owning a majority of common stock, do we make all debt holders whole? Would the govt take on all liabilities too?

These are not "nuances," they are fundamental questions, one's anyone who advocates restructuring BEGINS with. More important, none of them are big bang theory difficult. The hardest thing about them is political. It's long past time Obama used those out-size political gifts of his to lead with honesty about the economy, hard choices and concrete (not rosy pronouncements). It's long past time he stopped trusting the architects of the current mess, like Summers and Geithner, and hunker down himself.


— Susan P. Koniak, Boston University School of Law