Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America. For everywhere we look, there is work to be done. The state of our economy calls for action: bold and swift. And we will act not only to create new jobs but to lay a new foundation for growth.

When my daughter falls down, I usually say, “pick yourself up and brush yourself off.”

Not surprisingly, Barack Obama’s speech today was long on ambitions and short on specifics, as is customary for the occasion. We’ve been writing at length about the economic challenges that the Obama administration faces and some of its policy options, so there’s no need to rehash that in detail today. Suffice it to say that deep crisis creates a rare opportunity, and Obama has the opportunity to leave a greater mark on the economy than any president since Reagan or perhaps FDR.

On another note: Although this blog is generally about economics, I am particularly curious to hear what the new president will say about torture. I drafted a speech that I would like to hear him give over on Talking Points Memo Cafe.

This week’s moves by the British government have created the impression that bank nationalization is inevitable.  It is certainly the case that small-scale bank recapitalization, partial balance sheet clean-up, and various forms of financial engineering (e.g., insurance schemes for bad debt) are not only no longer enough, but may even be destabilizing. The problem is that once the market thinks you are on the move to a decisive solution but have not quite mustered the political will needed for complete resolution, it will assume that the final destination involves zero value for equity holders (and perhaps some bumps in the road for bank creditors).

The same logic is now being applied in Ireland and, to varying degrees, in other weaker eurozone countries.  And the knock-on effect from assumed nationalization of bank losses to fiscal sustainability is immediate.  Quoted Credit Default Swap spreads for some European sovereigns were wider than for investment grade corporates today, which of course makes no sense – but it does indicate extreme pressure in markets and deep confusion (or perhaps great clarity) regarding the impact on government balance sheets.

Nationalization is not the answer in the United States.  Continue reading “Nationalization Is Not Inevitable” →