How Far Down the Economic Hole Are We Headed?

By Frank Rich, The New York Times. Posted February 23, 2009.

The Obama White House may come up with euphemisms for nationalization (temporary receivership, anyone?). But whatever it’s called, what will it mean? The reason why the White House has been punting on the new installment of the bank rescue is not that the much-maligned Treasury secretary, Timothy Geithner, is incapable of getting his act together. What’s slowing the works are the huge political questions at stake, many of them with consequences potentially as toxic as the banks’ assets.

Will Obama concede aloud that some of our “too big to fail” banks have, in essence, already failed? If so, what will he do about it? What will it cost? And, most important, who will pay? No one knows the sum of the American banks’ losses, but the economist Nouriel Roubini, who has gotten much right about this crash, puts it at $1.8 trillion. That doesn’t count any defaults still to come on what had been considered “good” mortgages and myriad other debt, whether from auto loans or credit cards.

Americans are right to wonder why there has been scant punishment for the management and boards of bailed-out banks that recklessly sliced and diced all this debt into worthless gambling chips. They are also right to wonder why there is still little transparency in how TARP funds have been spent by these teetering institutions. If a CNBC commentator can stir up a populist dust storm by ranting that Obama’s new mortgage program (priced at $75 billion to $275 billion) is “promoting bad behavior,” imagine the tornado that would greet an even bigger bank bailout on top of the $700 billion already down the TARP drain.

Nationalization would likely mean wiping out the big banks’ managements and shareholders. It’s because that reckoning has mostly been avoided so far that those bankers may be the Americans in the greatest denial of all. Wall Street’s last barons still seem to believe that they can hang on to their old culture by scuttling corporate jets, rejecting bonuses or sounding contrite in public. Ask the former Citigroup wise man Robert Rubin how that strategy worked out.

We are now waiting to learn if Obama’s economic team, much of it drawn from the Wonderful World of Citi and Goldman Sachs, will have the will to make its own former cohort face the truth. But at a certain point, as in every other turn of our culture of denial, outside events will force the recognition of harsh realities. Nationalization, unmentionable only yesterday, has entered common usage not least because an even scarier word — depression — is next on America’s list to avoid.

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