William Isaac has a Wall Street Journal op-ed claiming that his experience at the FDIC during the time when Continental Illinois was taken into receivership has given him important insights into why we shouldn’t use nationalization as a solution to the problems of today’s large banks. The op-ed doesn’t, however, really do that. Instead, it just repeats a couple of common instances of argumentative ping-pong. One sequence goes like this:

1. Me: The FDIC nationalization process works well for dealing with small insolvent banks, so faced with a large insolvent bank we should do something similar.
2. Isaac: But we’re talking about much bigger banks, it’s a different situation!

The other goes:

1. Me: A nationalization process worked well for Sweden in the early 1990s, so faced with a similar banking crisis we should do something similar.
2. Isaac: But we’re talking about a much bigger country, it’s a different situation!

In both cases, it’s true, the scale is different. But you have to consider why nationalization is the appropriate response in other situations. The issue is that there are only really two other alternatives. One is that you can let the bank go under, thus ensuring that everyone to whom the bank owes money loses out and setting off a panic that paralyzes your financial system. The other is that you can just give free money to the bank, thus rewarding the managers and equity holders whose poor business decisions created the situation. Neither of those is a very appealing option. Thus, nationalization. Nothing about the banks in question being big, or about the United States being a large country, change the fact that the other options are bad. Isaac offers this alternative prescription:

The Obama administration should declare that nationalization of any major bank is off the table; that the government stands behind our entire banking system; and that our banks will continue to receive a nonvoting form of equity capital, such as convertible preferred stock, from the government to the extent needed. Yesterday’s joint announcement to this effect by the Federal Reserve, FDIC, the Comptroller of the Currency, and the Treasury is a critical step toward healing our banking system and economy. Well done.

This is the “free money” option. And while it’s true that our only examples of successful nationalization schemes come from much smaller countries, we do have an example from the world’s second-largest economy of what happens when you try to go down this road. It’s Japan in the 1990s and it didn’t work. Now it’s true that the fact that the alternative to nationalization failed in a large economy doesn’t prove that nationalization will work. In theory, it could just be the case that we’re screwed and that there’s no way for a large economy that runs into this problem to rescue itself absent decades of suffering. But it’s also possible that what’s been made to work in small countries can be made to work in large ones. And as Kevin Drum says, it’s not as if the government would be restaffing Citi and Bank of America de novo. By and large, the very people working at those banks today would keep on working there. Some senior managers would get fired. But the big difference is simply that you would create a situation where a robust bailout of the institutions doesn’t end up rewarding the existing shareholders and senior managers. Then you could do the bailout and refloat the bank to private investors. It’s not about having the government “run” the bank, it’s about making sure that bailouts don’t reward the wrong people.

Jason Furman is now Deputy Director of the National Economic Council. Conveniently, he also wrote an article for Slate back in April on what fiscal policy should look like. Thus far, everything that Obama’s done has been something that Furman recommended. But not everything Furman recommended has thus far made it into the budget. So it’s perhaps useful to take a look at what other kinds of ideas are bouncing around. Furman advocates:

1. “[I]ncreased sin taxes on items like cigarettes” which, as you know, I agree with. I’m not sure how much room there is left to run with federal cigarette taxes before we start producing a counterproductive black market, but there’s a strong case for higher alcohol taxes and a decent case for legalizing-and-taxing marijuana.

2. He says we should seek “a broader tax base by, for example, reforming the deductibility of the mortgage interest.” This is a very good idea, albeit politically difficult to implement. But insofar as we’re concerned with the long-run deficit, you could use a non-indexed cap such that over the years inflation will slowly phase the deduction out.
3. On Social Security he says “Two of my favorite options are raising that amount of Social Security payroll that is taxable and indexing benefits and/or taxes to the changing ratio of beneficiaries to workers.”
4. He calls for “scaling back on weapons systems originally designed to fight pitched battles on the plains of Europe,” which does seem to be the inclination of many inside the administration, but all signs are that they won’t actually seek to cut the defense budget or even to hold the defense budget steady. Instead, the White House will have a battle with the Pentagon over whether a country that accounts for half of global defense expenditures should engage in moderate real increases in defense spending or large real increases in defense spending. I expect fiscally conservative Blue Dog deficit hawks to be outraged by this state of affairs.*

Outside the realm of bullet points, two other things he suggests are switching the measure of inflation to the C-CPI-U and that cuts in small-bore government programs could be valuable “if only to create more confidence in the budget process.” The latter, I think, is something we very well may see. The President loves the line about going through the budget “line by line” and eliminating programs that don’t work, so they probably need to eliminate something or other to be able to keep saying it.

On the inflation index thing, this almost seems like a bipartisan deficit reduction no-brainer. It would, in effect, simultaneously raise taxes and cut spending but could be plausibly portrayed as doing neither—it’s just a technical adjustment to the way the Consumer Price Index is calculated! Of course, you would never want to do something like that as a one-party measure but if there’s ever a bipartisan commission or what have you, then this is a very appealing option. From an ideological point of view, I would say that the problem to watch out for is that you sometimes hear the suggestion that this switch should be made only for Social Security. That’s not something I would want to see progressives agree to. But make the switch across the board and it’s a progressive measure that, in exchange for a mild slowing of the growth in Social Security benefits, would also mildly increase not only the level of Social Security taxes but also income taxes more generally, generating revenue that can be used for all manner of worthy domestic purposes.

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Over at the Wonk Room, Peter Juul calls attention to our CAP colleague Brian Katulis’ paper on democracy promotion in the Middle East for the Century Foundation. It features the following bullets:

1. Restore U.S. credibility by disconnecting democracy and human rights promotion from U.S. security goals and reforming our own human rights and civil liberties practices. The Obama administration has already taken big step in this direction by directing the closure of the Guantanamo Bay prison camp by next January.

2. Use diplomacy to promote national consensus in key countries and address conflicts in the region. Internal conflicts in countries throughout the region – form Lebanon and the Palestinian Territories to Iraq and Yemen — are driven by the lack of a national political consensus on basic structures of governance. Moreover, resolving the Arab-Israeli conflict will create an environment in the region more conducive to democratic reform.

3. Integrate U.S. approaches to supporting democracy and governance reform in the region. All U.S. government assistance – from USAID to the State Department to military aid — should be coordinated to better encourage better governance by recipients of American funding and assistance.

4. Increase positive incentives for democratic reform. The model of the Millennium Challenge Corporation, which provided incentives to promote economic development and improved governance, is one the new administration can encourage reforms.

5. Diversify funding for democracy promotion in the region. Private philanthropy, endowments, partnerships and the like in the Middle East should be encouraged to take on political reform, building a stronger organic base for democracy and human rights.

6. Recognize the political power of Islamist forces. Like it or not, Islamist groups are potent political forces in many countries in the Middle East. Reform efforts that ignore them are at best incomplete, and the United States needs to take non-violent religious-political movements into account.

These are all excellent points. One thing I would add that I think has a tendency to go missing in these discussions is that the essential background for effective and sustainable democracy promotion is a relatively benign international climate. The end of the Cold War wound up being a boon to democracy not just because several Soviet-dominated countries in Central and Eastern Europe turned into democracies. It also helped spread democracy in Asia and Latin America, too, primarily because the United States no longer felt the need to support “our bastards” regimes and could, instead, make it clear that close relations with the U.S. depended on a proper respect for basic human and political rights. Great power conflict, by contrast, merely ensure than any actual or would-be dictator or revolutionary can always count on the support of one or the other external players.

That’s something to keep in mind in general as we try to stay true to our values while negotiating a transition to a more multipolar world. An emphasis on democracy and human rights implies some level of tension with the government of China. But at the same time, maintaining a basically friendly relationship with China is actually crucial to fostering an environment in which democracy and respect for human rights can blossom. That’s a difficult line to walk, but it’s important. And the general idea has application to the specific region. Working on the Israeli-Arab conflict or on trying to work toward an improved relationship with Iran can be seen as contrasting goals with democracy promotion. But at the same time, lowering international tensions in the Middle East would in many ways make it easier to move forward on democracy.