The Times today took the useful step of explain­ing some of the chal­lenges that the “bad bank” plan being con­sid­ered for the second half of the TARP money will face. But the article’s pre­sen­ta­tion of the plan is almost crim­i­nally incomplete:

While the gov­ern­ment is con­sid­er­ing sev­eral approaches to help­ing the banks, includ­ing more cap­i­tal injec­tions, buying or insur­ing toxic assets is likely to be a cen­ter­piece. Deter­min­ing the right price for these assets is cru­cial to suc­cess. Plac­ing too low a value would force insti­tu­tions sell­ing and others hold­ing sim­i­lar invest­ments to reg­is­ter crush­ing losses that could deplete their cap­i­tal and make it harder for them to increase lending.

But inflated values would bail out the com­pa­nies, their share­hold­ers and exec­u­tives at the expense of tax­pay­ers, who would swal­low the losses if the gov­ern­ment could not recoup what it had paid.

Some crit­ics of the plan warn that the gov­ern­ment should not buy the assets, because banks will try to get too high a price and leave tax­pay­ers hold­ing the bag.

This is true, but the more impor­tant crit­i­cism of the plan is that paying too much for bunk assets is the only way the plan can work, if by “work” we mean help­ing banks to avoid “crushing losses that could deplete their cap­i­tal and make it harder for them to increase their lending.” The prob­lem, there­fore, is not that the bad-​bank plan is con­fronting a pric­ing prob­lem that can be solved by clever needle-​threading. The prob­lem is the plan itself—and the fact that for some reason that Obama’s eco­nomic advi­sors (and, oddly, the Times reporters) are unwill­ing to con­tem­plate nation­al­iza­tion as an alternative.

For any talk of that, you have to go to the Op-​Ed page, where Paul Krug­man lays out the case for nation­al­iza­tion for about the fif­teenth time running:

Now, some­thing must be done to shore up the finan­cial system. The chaos after Lehman Broth­ers failed showed that let­ting major finan­cial insti­tu­tions col­lapse can be very bad for the economy’s health. And a number of major insti­tu­tions are dan­ger­ously close to the edge.

So banks need more cap­i­tal. In normal times, banks raise cap­i­tal by sell­ing stock to pri­vate investors, who receive a share in the bank’s own­er­ship in return. You might think, then, that if banks cur­rently can’t or won’t raise enough cap­i­tal from pri­vate investors, the gov­ern­ment should do what a pri­vate investor would: pro­vide cap­i­tal in return for par­tial ownership.

But bank stocks are worth so little these days — Cit­i­group and Bank of Amer­ica have a com­bined market value of only $52 bil­lion — that the own­er­ship wouldn’t be par­tial: pump­ing in enough tax­payer money to make the banks sound would, in effect, turn them into pub­licly owned enterprises.

My response to this prospect is: so? If tax­pay­ers are foot­ing the bill for res­cu­ing the banks, why shouldn’t they get own­er­ship, at least until pri­vate buyers can be found? But the Obama admin­is­tra­tion appears to be tying itself in knots to avoid this outcome.

Why the knots?

“We have a finan­cial system that is run by pri­vate share­hold­ers, man­aged by pri­vate insti­tu­tions, and we’d like to do our best to pre­serve that system,” says Tim­o­thy Gei­th­ner, the Trea­sury sec­re­tary — as he pre­pares to put tax­pay­ers on the hook for that system’s immense losses.

Mean­while, a Wash­ing­ton Post report based on admin­is­tra­tion sources says that Mr. Gei­th­ner and Lawrence Sum­mers, Pres­i­dent Obama’s top eco­nomic adviser, “think gov­ern­ments make poor bank man­agers” — as opposed, pre­sum­ably, to the private-​sector geniuses who man­aged to lose more than a tril­lion dol­lars in the space of a few years.

And this prej­u­dice in favor of pri­vate con­trol, even when the gov­ern­ment is putting up all the money, seems to be warp­ing the administration’s response to the finan­cial crisis.

Only the Repub­li­cans were stupid enough to con­fuse Obama for a social­ist last elec­tion; like most people, I never had any illu­sions about his fidelity to free-​market cap­i­tal­ism. During the cam­paign, how­ever,, his defense of free mar­kets was–to borrow the ver­nac­u­lar of the day–”pragmatic,” not “ideological”: he argued that mar­kets were an effi­cient way to allo­cate scarce resources, not that they were the eco­nomic embod­i­ment of human freedom.

I could live with that defense, even though I would prob­a­bly dis­agree with Obama about where the lim­it­ing line around mar­kets ought to be. But it’s simply not pos­si­ble to defend the bad-​bank plan on so-​called prag­ma­tist grounds. (In fact, putting it down to ide­ol­ogy is prob­a­bly the most char­i­ta­ble inter­pre­ta­tion of the plan; at least as likely are the prospects that it was designed to be a pure cor­po­rate give­away or to avoid unfriendly polit­i­cal ram­i­fi­ca­tions.) The most effi­cient way to use the remain­ing TARP funds is to do what Krug­man rec­om­mends: buy the banks, strip out the man­age­ment and cur­rent owners, and sell them off once you’ve estab­lished their true value.

It’s pretty clear that’s not going to happen, even though polit­i­cal ide­ol­ogy mas­querad­ing as eco­nomic sci­ence was the cause of this whole mess. I can’t say I find that sur­pris­ing, but I sure do find it disappointing.