the black hole ...

AN interesting piece in the Washington Post on March 10 about the dilemmas facing Treasury Secretary Geithner by David Smick, a global investment strategist who seems able to make some sense out of all this financial stuff. A quotation:

Here's another likely Geithner fear — that Congress forces the banks' bondholders to take a hit. So far, only stockholders have lost out because of the banking crisis. One reason for the fragility in the credit default swap market of late is that markets fear that bank bondholders, who today are protected even before U.S. taxpayers, could soon see their status change. The worry is that if even bondholders are put at risk, U.S. and foreign investors alike would stop financing all corporate America. The administration says that won't happen, but market participants believe (probably correctly) that this White House can't control Congress.

So our Treasury secretary has no choice but to talk of bank stress-testing and other tactics to buy time before the big bank bailout. Notice that the president's budget already contains a contingency fund of up to $750 billion for a future bank bailout — a politically shrewd number that roughly matches the size of the Paulson bailout. The true cost is likely to be two or three times as much, unless some last-minute intellectual breakthrough — a tax holiday for derivatives? — arises.

The Obama team needs to remember that we got into this mess because of a lack of financial transparency. It's time to tell the American people what the stock market already knows: that the path to recovery will probably be expensive and politically unpopular, perhaps explosively so. This dire situation could take us all down, which is why Obama should name a proven, world-class problem-solver who is not from Wall Street as his bank workout czar. James Baker, the former Republican secretary of state and Treasury secretary, comes to mind. Other possibilities: former Democratic senators Bill Bradley or George Mitchell. Perhaps the White House should name a team.