How Geithner's Plan Leads to Nationalization

The reaction to Timothy Geithner's new bank plan from liberals has been largely despairing, but there's an interesting contingent arguing that even if the bank plan isn't great economics, it's still good politics. The argument would be that not only does the plan bypass Congress and free up capital (political and otherwise) to devote to health care and energy, as Matthew Yglesias suggests, its failure might also make nationalization inevitable.

Here's the logic: If Geithner's plan fails, it will probably be for one of two reasons. The first is that a stress test reveals that the bank's assets are truly worthless, which makes nationalization appear more palatable to Wall Street. The second is that the bank's assets are valued too high for investors, in which case the private sector backs out, the plan falls apart, and we've crossed out one more idea on a list of ideas that ends with nationalization. As Kevin Drum explains, "far from making nationalization more difficult, its failure would make it both inevitable and broadly acceptable."

There's a pragmatic sneakiness to these forward-looking arguments, but the second scenario would seem to undermine the first. Let's say Geithner's newest plan fails so spectacularly that nationalization seems dandy by comparison. Wouldn't the political cost to Obama be tremendous, deepening the backlash against the administration's competence and hurting his chances to revolutionize heath care and energy?

Second, the plan could expose the fundamental insolvency of the banks. There's always the chance that this public-private partnership peeks under the hood of the car and finds that it's not just a lemon: It's got no engine! If some of these toxic assets are close to worthless, news of the bank's insolvency could trigger another wave of Dow drama and zap whatever is left of Geithner's integrity.