If worst really does come to worst, the other options may evaporate, leaving the government no choice but to nationalize some banks. (Think Fannie Mae and Freddie Mac.) But, please, let’s not rush there. Let’s first at least explore what is called the “good bank, bad bank” approach. What’s that? While there are many variants, the basic idea is to break each sick institution into two. The “good bank” gets the good assets, presumably all the deposits and a share of the bank’s remaining capital. As a healthy institution, it can presumably raise fresh capital and go on its merry way as a private company.

The “bad bank” inherits the bad assets and the rest of the capital — which, after appropriate markdowns of the assets, will not be enough. So, again, someone must fill the hole. And, realistically, given the mess we’re in, much of that new capital would likely come from the taxpayers. Here’s a prediction: We will get to the good-bank, bad-bank solution sooner or later. Wouldn’t it be nice if it was sooner?

(Emphasis supplied.) Ok, this is not much of an argument in my opinion. Why does Blinder support this approach? In essence, Blinder is arguing against nationalization of banks. He hypothesizes many difficulties (I write "hypothesize" because we have never done itand thus have no actual evidence that it will happen)) and Blinder is speculating in my opinion. Here is his pitch against nationalization:

WHERE TO DRAW THE LINE? First and foremost, the Swedish government had to deal with only a handful of banks; we have more than 8,300. Numbers matter, because deciding where to draw the nationalization line isn’t easy. Presumably, no one wants to nationalize all the banks, thousands of which are healthy. But where do you stop, once you start?

(Emphasis supplied.) Hmm, "it isn't easy" to know where to draw the line is the argument here? But of course, taking over the "bad banks" will be easy as pie. First reaction, not at all convincing. This is a mess. Of course no option is going to be easy.

On top of that, Blinder's approach is to stick taxpayers with the "sh*tpile" and let the banks skip merrily away with the "good bank." The question is why? Because "drawing the line" ain't easy is not much of a justification in my opinion. Blinder continues:

Suppose we nationalized four banks. Bank Five would then find itself at a severe disadvantage in competing for funds with the government-backed quartet. Forced to pay higher interest rates to attract depositors and other creditors, its profitability would suffer. Soon, Bank Five might start looking like a candidate for nationalization, too — followed by Banks Six, Seven and so on.

This is sheer speculation and, in my opinion, certainly remediable. Any competitive advantage a nationalized bank would have would almost certainly be shortlived, as nationalization is temporary, and for that short period of time, the government could offer financing to other banks at the same terms the nationalized bank is receiving. Personally, I doubt Blinder's competitive advantage theory simply because the short term damage to the image of a bank that had to be nationalized would pretty powerful. Indeed, it is one of the reasons why Citibank should be nationalized already - it already is suffering all the effects of image damage, it already is getting tons of government money and it is already 36% owned by the government. At this point, Citi is a zombie. If nothing else, we can try nationalization on Citibank and see how it works.

Blinder continues:

THE DOMINO EFFECT As stock traders began to contemplate the nationalization of Banks Five, Six and Seven, their share prices would tank, and short-sellers might consign the companies to an early grave.

Um, Citi is trading at 1. BOA is at 3. All of the financial stocks are way down. The domino effect has already happened. So much for this rationale against nationalization.

THE MANAGEMENT CHALLENGE The Swedes had a relatively simple task. They never had to deal with institutions of the size and complexity of our banking behemoths. Mr. Geithner has emphasized that governments are ill-suited to manage businesses. I’d take the point a step further: Overseeing the management of dozens, or hundreds, or maybe even thousands of nationalized banks is a daunting task.

Of course it is a daunting task. this is not an option of choice. It is a necessary evil. This is not even an argument in my opinion.

POLITICAL OBSTACLES The process of nationalization and reprivatization went amazingly well in Sweden partly because it was remarkably free of political interference. Would that happen here? You decide. My bet is no.

Well, as long as you are betting Mr. Blinder, that makes me feel much better. Here's a political reality for Mr. Blinder to contemplate - is Congress gonna pay for his "good bank, bad bank" proposal? My bet is no. Now what?

Now Blinder practices psychology:

THE CONFIDENCE QUESTION Finally, because nationalization runs counter to deeply ingrained American traditions and attitudes, there is a danger that it might undermine rather than bolster confidence. As I said, this is not Sweden. The Treasury, of course, would never use “nationalization” in public; it would invent some nice euphemism. But the commentariat would not be so constrained.

(Emphasis supplied.) When FDR embarked on The New Deal, he REALLY took on "deeply ingrained American traditions and attitudes." And the commentariat blasted him. But the American People were happy someone took bold action In the end, Blinder describes a timid approach that in effect is as risky as the bolder approaches that have been proposed. We need bold now. As FDR said in his 1932 Oglethorpe speech:

The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.

Blinder is not ready to be bold.

Speaking for me only