There's a conventional wisdom about the Johnson administration that says, LBJ has all these great plans for domestic policy — Civil Rights, the Great Society — but he didn't understand foreign affairs nearly as well as he understood domestic policy. And the one thing he did understand is that the 50's had been dominated by witch hunts over who “lost China”. And the one thing LBJ knew is that he wasn't going to have the albatross of “losing Vietnam” hung around his neck. And thus the Best and the Brightest, the bombing, the escalation and all the rest of it.
Cut to the banking crisis.
Certainly the plan that Obama's economic team have come up with has all the hallmarks of coming from the used policy shop — Krugman even calls them 'zombie ideas' playing off the idea that we are propping up zombie banks.
Open Left's Department of Solving Problems Using the Same Thinking Used To Create Them has a fine roundup of the professional critiques. They seem pretty damning to me.
To the extent I can find defenders of the plan, they tend to make two points:
- Team Obama is constrained by what can get through the Senate. The best ideas, bigger stimulus, nationalizing banks, or starting a set of new clean federal banks to pick up the financial slack, just won't get past the troglodyte GOP and their enablers like Lieberman, Nelson, and Bayh.
- The bankers are running around in private saying that the sky will fall any day now, civilization will end, ATMs will dry up there will be riots in the streets, unless banks get massive donations to rescue their balance sheets. It's not true, but they may believe it, and their panic is contagious.
Both these points, especially the first, have merit, but not nearly enough to justify preemptive surrender that requires not only rewarding the massively guilty, but creating new entities filled with moral hazard in which the public takes only the bitter and never the sweet.
The Treasury's plan is just plan bad. I hope it will not be Obama's Vietnam.