So, I've gotten kind of impatient with waiting for Geithner or Bernanke or someone to explain exactly what they're going to do with the banking system.  I know that nationalization is way too scary to contemplate, despite the fact that the process the word actually refers to in this context has been ongoing with smaller banks and doesn't represent anything even remotely approaching permanent government ownership of these institutions, but what is the "public-private partnership" of which they speak?

Well, I happened across this post on Greg Mankiw's blog.  It's from brack in the beginning of October, right when the market started to fall off a cliff, but I found this description to be informative:

Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date.

This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.

Why would an undercapitalized financial firm take advantage of this offer? Because it would need to raise only half as much capital from private sources, that financing should be easier to come by. With Warren Buffetts in scarce supply, the government can in effect replicate them, by pigging backing on what they do.

Given, Mankiw was not describing whatever the current administration has in mind, but it sounds a lot like what a public-private partnership might look like.

I have a couple of observations about all of this.  First, what Mankiw describes probably appeals to you if you think that private ownership of the banks must be maintained at all costs.  That appears to be the point of view of the current admin, as Geithner, Bernanke, Summers and Obama have all indicated that they want to avoid taking over the larger banks (and it's really primarily the big banks at issue here because, as I've said, we're already doing this with numerous smaller banks).

However, this arrangement doesn't really clean up the mess.  If this prescription is really so much better than putting these banks in receivership, zeroing out shareholders and booting out current management, why isn't anyone making this argument clearly?

One thing that really concerns me here is that I've heard it observed that one of the key steps in resolving financial messes of this stripe involves booting out the current management.  Sometimes this is referred to as "breaking the backs of the elites".  What you have right now, as Krugman continues to point out, is lemon socialism.  You have the same vanguard that failed to do their jobs being propped up by the taxpayer with no downside risk.  All they see right now is upside.  The public-private arrangement doesn't change this.  You'll have the same people running the show, except that it's arguably easier for them to attract new capital from the private sector, but only because the private sector knows that government will match what they put in.

Other than that, you haven't gotten rid of the problem children and, with non-voting shares, the government doesn't really have any power to move things along any faster.  Given, almost half a year later, that the financial situation has gotten worse, not better, I wonder what Mr. Mankiw would say about it right now.

All of this still leaves the question lingering in my mind: Why is the Obama administration working so hard to avoid biting the bullet on this?  I don't buy the explanation that it would be too complicated to put these larger banks into receivership.  On the one hand, it doesn't say much for the audacity of hope to simply say, "That's too hard!"  On the other hand, if these banks are "too big to fail" and to big to be dealt with like we deal with other banks in the same boat, then they need to be received and sold off.

The last thing we want is zombie banks, managed by the same people who failed in their task and funded by the taxpayer, to continue their brain-munching feast on our economic outlook.