Where is the Geithner Stick?

The Geithner Plan does not appear to me to have anything working for it but gravity. I think of banks as weighed down birds hovering over a pit of insolvency. Then again so is every business. What if they decide to limp along?  How do you convince a bank, or any other business, to perform well and in the best interests of a newly shaped economy? The fact that this question cannot be answered with anything but compelling force is the fundamental dilemma we face at this crossroads.

The answer is industrial policy, which is a euphemism for socialism. There is no way around it.

Who killed capitalism? The bad capitalists. It is as it ever was. The question for our times is to discover if those who remain understand what is at risk and if they can hold out. You see, every day I hear economists and financial experts saying that a 7% ROI is the best that can be expected from now on. And you can bet that when inflation hits and interest rates start creeping up, the smartest people are going to be hard pressed to make their businesses have higher margins than that for investors.

I'm still reading the reaction to Obama and Geithner and I don't have a comprehensive bead on the particulars, but there has got to be more than just gravity at work here. If my bank doesn't pass the stress test, and I refuse government funds, then what? Am I automatically a bad bank? What happens to a bad bank? Am I forced to liquidate? Does the government take me over? On what authority? What happens to a bad car maker? What happens to a bad business? Is the government now going past regulation into something more authoritarian? And how is the Average Joe supposed to know when enough is enough?

A trillion dollars of carrot is a hell of a lot of government spending. And Obama's entire presidency hinges on whether or not the economy swings into line under his program. So where is the stick? Will Obama just say 'oh well', if GDP doesn't obey his formula? I don't think so.

And so, you know, I think that you have two choices in this situation: You can prolong the agony and shareholders will be happy until they’re not happy, and that could be a year from now or two years from now, or, in the case of Japan, eight years later. Or you can just go ahead and acknowledge that, yeah, there’s a lot of work that has to be done to put these banks back on a firmer footing.
-- Barack Obama, Feb 2009