ObamaCare's Inevitable Logic

The president may be talented, but he can't repeal the laws of supply and demand.

John Stossel

False charges about Obamacare don't help.

Like the end-of-life tempest. Former Alaska Gov. Sarah Palin popularized the term "death panels." She said: "The America I know and love is not one in which my parents or my baby with Down syndrome will have to stand in front of Obama's 'death panel' so his bureaucrats can decide, based on a subjective judgment of their 'level of productivity in society,' whether they are worthy of health care."

The charge that the House and Senate health care bills would mandate end-of-life counseling—hence "death panels"—caught on. Rush Limbaugh, defending Palin's charge, said, "(D)eath panels ... it's a great way to phrase this end-of-life counseling."

Republican Sen. Chuck Grassley of Iowa piled on: "You have every right to fear. ... We should not have a government program that determines if you're going to pull the plug on grandma."

But no bill in Congress mandates end-of-life counseling, much less "death panels." And there's a deeper problem. When opponents of nationalization make such easily refuted charges, supporters of nationalization gain the upper hand. All criticism is undermined. Neutral observers can easily conclude, "If the death-panel claim is false, why believe anything else the critics say?"

That would be a disaster.

There's is reason to be concerned about end-of-life counseling, but the truth is more complicated. Here's the story.

The House bill does deal with the issue. (The Senate Finance Committee bill did until the provision was removed the other day.) Section 1233 amends the Medicare law to add "advance care planning consultation" (counseling about living wills and the like) to the list of reimbursable services. The provision defines "consultation," but nowhere does it require Medicare beneficiaries to participate or authorize death panels. (Grassley voted for a similar provision in 2003 when his Republican-controlled Congress added drug coverage to Medicare.)

But even if some conservative Republican critics are wrong about Section 1233, there is good reason to worry about Obama's nationalization scheme.

The reason can be found in Econ 101. Medical care doesn't grow on trees. It must be produced by human and physical capital, and those resources are limited. Therefore, if demand for health care services increases—which is Obama's point in extending health insurance—prices must go up. But somehow Obama also promises, "I won't sign a bill that doesn't reduce health care inflation."

This is magical thinking. Obama, talented as he is, can't repeal the laws of supply and demand. Costs are real. If they are incurred, someone has to pay them. But as economist Thomas Sowell points out, politicians can control costs—by refusing to pay for the services.

It's called rationing.

Advocates of nationalization hate that word because it forces them to face an ugly truth. If government pays for more people's health care and wants to control costs, it must limit what we buy.

So much for Obama's promise not to interfere with our freedom of choice.

This brings us back to end-of-life consultation. As the government's health care budget becomes strained, as it must—and, as Obama admits, already is under Medicare—the government will have to cut back on what it lets people have.

So it is not a leap to foresee government limiting health care, especially to people nearing the end of life. Medical "ethicists" have long lamented that too much money is spent futilely in the last several months of life. Are we supposed to believe that the social engineers haven't read their writings?

And given the premise that it's government's job to pay for our heath care, concluding that 80-year-olds should get no hip replacements makes sense. The problem is the premise: that taxpayers should pay. Once you accept that, bad things follow.

In the end, perhaps the biggest objection to nationalized health care is the "principal-agent problem." For whom does the doctor work? Ordinarily, the doctor is the agent of the patient. But when government signs the checks and orders doctors to reduce spending, it is not crazy to think that this won't influence their "advance care planning consultation."

Freedom is about self-determination. Obama's health care scheme would undermine both.

John Stossel is co-anchor of ABC News' 20/20 and the author of Myth, Lies, and Downright Stupidity. He has a new blog at http://blogs.abcnews.com/johnstossel.

ObamaCare Isn't Inevitable

Americans are increasingly concerned about the cost -- in money and personal freedom -- of the president's nanny-state initiatives.

KARL ROVE

While still good, President Barack Obama's political health is deteriorating, threatened by what he thought would be balm -- his ambitious plan for a government takeover of health care.

Mr. Obama remains slightly more popular than most presidents have been in their opening months. But his job approval rating has drifted down to 60% in the RealClearPolitics.com average. His disapproval numbers have nearly doubled to 33%.

More troubling to Team Obama is the growing gap between the president's approval rating and declining support for major items on his policy agenda. Independents are increasingly joining Republicans in opposition to administration initiatives that range from reviving the economy to closing the terrorist detention facility at Guantanamo.

Chad Crowe

Things will likely get worse in the coming months as the congressional stage comes to be dominated by health care. A new poll by Resurgent Republic (a nonprofit, right-of-center education organization whose creation I helped spur), reveals some of the president's challenges. By a 60%-to-31% margin, Americans prefer getting their health coverage through private insurance rather than the federal government.

Mr. Obama's record-setting spending binge has also made Americans more sensitive to deficits and higher taxes. Thirty-nine percent said they supported "a health-care plan that raises taxes in order to provide health insurance to all Americans," while 52% preferred "a plan that does not provide health insurance to all Americans but keeps taxes at current levels." By a 58%-to-37% margin, American prefer reforming health care "without raising taxes or increasing the deficit" to government investing "new resources to make sure it is done right."

This is why Senate Finance Committee Chairman Max Baucus blanched when committee staffers priced his -- which is also the Obama administration's -- draft legislation at a cool $1.6 trillion over the next decade.

The federal government will release an update on the deficit in mid-July, which will likely increase the public's fear of deficit spending. The current fiscal year's $1.8 trillion deficit is likely to grow significantly.

About Karl Rove

Karl Rove served as Senior Advisor to President George W. Bush from 2000–2007 and Deputy Chief of Staff from 2004–2007. At the White House he oversaw the Offices of Strategic Initiatives, Political Affairs, Public Liaison, and Intergovernmental Affairs and was Deputy Chief of Staff for Policy, coordinating the White House policy making process.

Before Karl became known as "The Architect" of President Bush's 2000 and 2004 campaigns, he was president of Karl Rove + Company, an Austin-based public affairs firm that worked for Republican candidates, nonpartisan causes, and nonprofit groups. His clients included over 75 Republican U.S. Senate, Congressional and gubernatorial candidates in 24 states, as well as the Moderate Party of Sweden.

Karl writes a weekly op-ed for The Wall Street Journal, is a Newsweek columnist and is now writing a book to be published by Simon & Schuster. Email the author at Karl@Rove.com or visit him on the web at Rove.com.

Or, you can send him a Tweet @karlrove.

There is some good news in the Resurgent Republic poll for Mr. Obama if he can sell his plan as shifting power from "insurance bureaucrats to consumers." Resurgent's poll found that Americans favor that by 57% to 38%.

But to argue, as Mr. Obama does, that a government-run health-care plan can control costs better than a market-based system is a mistake. This argument is belied by Medicare's experience. A study published by the Pacific Research Institute finds that since 1970 Medicare's costs have risen 34% a year faster than the rest of health care.

Mr. Obama's trashing of American health care as "a broken system" that must be brought "into the 21st century" doesn't resonate with most Americans. They are happy about their health care, doctor and hospital. Resurgent's poll found that 83% of Americans are very or somewhat satisfied with the quality of care they and their families receive.

Nearly everyone agrees that some reforms are needed. But it is also vital to protect areas of excellence and innovation. Stanford University professor Scott Atlas points out that from 1998 to 2002 nearly twice as many new drugs were launched in the U.S. as in Europe. According the U.S. Pharmaceutical Industry Report, some 2,900 new drugs are now being researched here. America's five top hospitals conduct more clinical trials than all the hospitals in any other developed country, according to Mr. Atlas. And a McKinsey Co. study reports that 40% of all medical travelers come to the United States for medical treatment.

Transforming health care into a government-run system would be difficult to do under any circumstances. Americans are still wary about big government. Health-care reform also always sounds better in the abstract. Public resistance rises once liberals are forced to release the details of their plans.

Meanwhile, the $787 billion stimulus package has not provided the economic kick Mr. Obama promised. The $410 billion Omnibus spending bill the president signed in March and his $3.5 trillion budget plan for next year are also adding to the river of red ink.

Health-care reform was said to be "inevitable" a few months ago. Today, its prospects are less certain, even to Democrats. The issue may even turn out to be a millstone for the party.

Americans are increasingly concerned about the cost -- in money and personal freedom -- of Mr. Obama's nanny-state initiatives. To strengthen the emerging coalition of independents and Republicans, the GOP must fight Mr. Obama's agenda with reasoned arguments and attractive alternatives. Health care may actually be an issue that helps resurrect the GOP.

Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.

Geithner May Find Courage in Inevitable Ouster

Geithner May Find Courage in Inevitable Ouster: Kevin Hassett

Commentary by Kevin Hassett

March 23 (Bloomberg) -- Timothy Geithner’s ordeal last week reminded me of the television series “Quantum Leap,” in which a scientist played by Scott Bakula would travel back in time and attempt, against impossible odds, to fix history.

If the show were still running today, we might see an episode in which Bakula travels back to 2005 and finds himself running the Federal Emergency Management Agency during Hurricane Katrina. The federal apparatus was fundamentally unable to deal with a disaster of that scale, and even a time traveler from the future, armed with the benefit of hindsight, would have little chance to favorably affect events.

As unmanageable as Katrina might have been, landing at the U.S. Treasury Department in Geithner’s place would be worse. The financial catastrophe is more difficult than a hurricane in every dimension. You can see a hurricane, know its likely path and understand what to do after it strikes.

The financial crisis is invisible, its scale immense, and nobody can be certain about the proper steps to take. The cost of rescuing American International Group Inc. alone is almost double the total federal costs of Hurricane Katrina.

Which makes it easy to feel a great deal of sympathy for the Treasury secretary. Last week, amid the outrage over AIG, the airwaves were filled with calls for Geithner’s resignation. The Intrade.com prediction market’s future on whether he steps down by year’s end climbed to 32 percent, up from about 25 percent two weeks ago.

Incompetence, Corruption

The problems with bonuses at AIG are, in all likelihood, only the tip of the iceberg. A federal government that couldn’t deliver potable water to disaster victims after Katrina is charged with distributing trillions of dollars in a financial rescue operation. Any government project of that scale is essentially impossible to manage. There will be incompetence. There will be corruption. People will go to jail.

And to make matters worse, Washington insiders understand this. That’s why Geithner can’t find people willing to accept a political appointment at Treasury. Not many people are willing to expose themselves to the type of abuse that Geithner is already suffering. Indeed, for a smart Democratic careerist, the optimal move is to wait until this mess is behind us, and only then take a job in Barack Obama’s administration.

If we truly were living through a “Quantum Leap” episode, what would Al -- the friend from the future who appeared periodically to provide information and moral support to Bakula’s character -- tell Geithner?

Stop Worrying

First, he would tell the Treasury secretary that he should stop worrying about getting fired this year. There have been 73 Treasury secretaries in U.S. history. The average term has been about three years, with the shortest being that of Joseph Barr, who filled the role for the final month of Lyndon Johnson presidency. Only a handful have left under pressure or some other difficult circumstances.

Presidents are reluctant to fire Cabinet secretaries in their early months because such a swift change makes the president look like a rube. If Obama were to fire Geithner right now, it would cast the administration into a politically lethal level of chaos. There will be a whole lot of whining and moaning, but his job is safe for now.

The second thing Al might tell Geithner is that he should be prepared to be fired in the second year. When the inevitable bad news about the bailouts comes out -- misspent money, missing money, fraudulent conveyance of assets, you name it -- Obama will need to look decisive in order to preserve his political viability. An easy way to do that will be to fire some of his economic officials. If the economy is bad, he will fire someone whether it’s deserved or not.

No Big Deal

The good news is that being fired isn’t a big deal in government any more. Economist Larry Lindsey saw his stature in Washington rise as a result of being fired by George W. Bush. This is both because his economic pronouncements were so sage in retrospect and because he handled his ouster with such class.

Geithner will probably be fired no matter what he does, so he should stop worrying about it and just focus on doing the best he can.

Right now, the Treasury’s biggest problem is that it is short-staffed. Geithner must find a way to build a competent team at Treasury that can help minimize all of the damage that will be wrought by government fecklessness. He has had troubles recruiting top Democrats to help him run Treasury. He should stop trying and take a “quantum leap” by recruiting top Republicans instead.

Such a solution works for three reasons.

Spread the Blame

The political types in the White House will like the idea because it will help them spread the blame around when the inevitable blow-ups occur.

Second, there are plenty of top minds in the Republican party, people like Michael Boskin or R. Glenn Hubbard, who could make a big difference at Treasury right now.

Third, top Republicans -- unlike their Democratic counterparts -- will not turn down a job today because they hope to get a choicer job tomorrow. The top jobs are going to Democrats in the Obama administration for as long as it exists.

There is still time for the Geithner story to have a happy ending.

Geithner May Find Courage in Inevitable Ouster: Kevin Hassett

Geithner May Find Courage in Inevitable Ouster: Kevin Hassett

Commentary by Kevin Hassett

March 23 (Bloomberg) -- Timothy Geithner’s ordeal last week reminded me of the television series “Quantum Leap,” in which a scientist played by Scott Bakula would travel back in time and attempt, against impossible odds, to fix history.

If the show were still running today, we might see an episode in which Bakula travels back to 2005 and finds himself running the Federal Emergency Management Agency during Hurricane Katrina. The federal apparatus was fundamentally unable to deal with a disaster of that scale, and even a time traveler from the future, armed with the benefit of hindsight, would have little chance to favorably affect events.

As unmanageable as Katrina might have been, landing at the U.S. Treasury Department in Geithner’s place would be worse. The financial catastrophe is more difficult than a hurricane in every dimension. You can see a hurricane, know its likely path and understand what to do after it strikes.

The financial crisis is invisible, its scale immense, and nobody can be certain about the proper steps to take. The cost of rescuing American International Group Inc. alone is almost double the total federal costs of Hurricane Katrina.

Which makes it easy to feel a great deal of sympathy for the Treasury secretary. Last week, amid the outrage over AIG, the airwaves were filled with calls for Geithner’s resignation. The Intrade.com prediction market’s future on whether he steps down by year’s end climbed to 32 percent, up from about 25 percent two weeks ago.

Incompetence, Corruption

The problems with bonuses at AIG are, in all likelihood, only the tip of the iceberg. A federal government that couldn’t deliver potable water to disaster victims after Katrina is charged with distributing trillions of dollars in a financial rescue operation. Any government project of that scale is essentially impossible to manage. There will be incompetence. There will be corruption. People will go to jail.

And to make matters worse, Washington insiders understand this. That’s why Geithner can’t find people willing to accept a political appointment at Treasury. Not many people are willing to expose themselves to the type of abuse that Geithner is already suffering. Indeed, for a smart Democratic careerist, the optimal move is to wait until this mess is behind us, and only then take a job in Barack Obama’s administration.

If we truly were living through a “Quantum Leap” episode, what would Al -- the friend from the future who appeared periodically to provide information and moral support to Bakula’s character -- tell Geithner?

Stop Worrying

First, he would tell the Treasury secretary that he should stop worrying about getting fired this year. There have been 73 Treasury secretaries in U.S. history. The average term has been about three years, with the shortest being that of Joseph Barr, who filled the role for the final month of Lyndon Johnson presidency. Only a handful have left under pressure or some other difficult circumstances.

Presidents are reluctant to fire Cabinet secretaries in their early months because such a swift change makes the president look like a rube. If Obama were to fire Geithner right now, it would cast the administration into a politically lethal level of chaos. There will be a whole lot of whining and moaning, but his job is safe for now.

The second thing Al might tell Geithner is that he should be prepared to be fired in the second year. When the inevitable bad news about the bailouts comes out -- misspent money, missing money, fraudulent conveyance of assets, you name it -- Obama will need to look decisive in order to preserve his political viability. An easy way to do that will be to fire some of his economic officials. If the economy is bad, he will fire someone whether it’s deserved or not.

No Big Deal

The good news is that being fired isn’t a big deal in government any more. Economist Larry Lindsey saw his stature in Washington rise as a result of being fired by George W. Bush. This is both because his economic pronouncements were so sage in retrospect and because he handled his ouster with such class.

Geithner will probably be fired no matter what he does, so he should stop worrying about it and just focus on doing the best he can.

Right now, the Treasury’s biggest problem is that it is short-staffed. Geithner must find a way to build a competent team at Treasury that can help minimize all of the damage that will be wrought by government fecklessness. He has had troubles recruiting top Democrats to help him run Treasury. He should stop trying and take a “quantum leap” by recruiting top Republicans instead.

Such a solution works for three reasons.

Spread the Blame

The political types in the White House will like the idea because it will help them spread the blame around when the inevitable blow-ups occur.

Second, there are plenty of top minds in the Republican party, people like Michael Boskin or R. Glenn Hubbard, who could make a big difference at Treasury right now.

Third, top Republicans -- unlike their Democratic counterparts -- will not turn down a job today because they hope to get a choicer job tomorrow. The top jobs are going to Democrats in the Obama administration for as long as it exists.

There is still time for the Geithner story to have a happy ending.

Is Nationalization Inevitable?

One Big Bad Bank

Is Nationalization Inevitable?

By PETER MORICI

The Obama Administration is on track to nationalize the nation’s largest banks, unless it alters policy and creates a Bad Bank to absorb commercial banks’ mortgage-backed securities.

The housing market and banks are caught in a vicious cycle.

The market is glutted by builders with too many new homes, speculators unloading vacant houses, banks with repossessed properties, and homeowners seeking relief from mortgage commitments.

As housing prices fall, more homeowners with adjustable-rate-mortgages cannot refinance when their rates reset, and others, simply discouraged, default. Supply increases again, perpetuating the spiral of falling home values, mortgage defaults, and bank losses on mortgage-backed securities.

To cover losses, banks should raise new private capital by selling additional stock. But investors, seeing no end to falling home prices and bank losses, have pushed down share prices to levels making it impractical for banks to raise capital.

The TARP has aggravated the problem.

When first approved by Congress, Treasury was to buy mortgage-backed securities from the banks, but it ultimately determined it was not possible to assess their values. Instead, Treasury used TARP to inject capital into banks, purchasing warrants convertible to bank shares, and left banks to work out their problems.

As losses mounted, so did Treasury’s equity stake and involvement at Bank of America, Citigroup and several other banks. Many investors fear sweeping nationalization is inevitable, and have become even more reluctant to purchase bank stocks.

Those fears will continue until the mortgage-backed securities are removed from the banks’ balance sheets or their potential damage neutralized. However, Treasury Secretary Geithner’s proposal to create a public-private investment fund to value these assets and mitigate their consequences is vague and hauntingly reminiscent of the strategy the original TARP was forced to abandon.

As housing prices fall, the banks will have no place to go but the government for the capital to cover losses, and their ownership will pass into government hands, first Citigroup and then others.

Economists, whether employed by banks or the Treasury, cannot reasonably estimate the ultimate value of mortgage-backed securities and the losses banks will take until the number of defaults and foreclosures is known, and that is the trap that snares the market.

The number of foreclosures cannot be divined without knowing how far housing prices will fall, and the drop in housing values cannot be estimated without knowing the number of defaults and how many houses will be dumped onto the market.

A federally sponsored “bad bank,” or “aggregator bank” could purchase all of the mortgage backed securities from commercial banks at their current market-to-market values on the books of the banks. It could determine the number of defaults by performing triage on mortgages—deciding which homeowners if left alone will pay their mortgages, which if offered lower interest rates and moderate principal write downs could reasonably service new loans, and which must be left to fail.

Implementing those standards and necessary mortgage modifications across the entire market would, at once, limit the number of defaults and determine how much housing prices will ultimately fall. That is something the individual banks cannot accomplish acting independently.

The Bad Bank could be capitalized with $250 billion from the TARP, and it could raise additional capital by selling $250 billion in shares, and another $500 billion to $1 trillion by issuing bonds. The commercial banks could be paid for their securities with 25 percent in shares and the rest in cash.

By sweeping all the mortgage-backed securities off the books of the banks and limiting losses on those securities, the Bad Bank would earn money collect payments on the majority of mortgages that ultimately pay out and sell off repossessed properties at a measured pace. Like the Savings and Loan Crisis Resolution Trust, and the Depression- era Home Owners’ Loan Corporation, it would likely make a profit.

Relieved of the mortgage backed securities, the banks would not be trouble free—they still have auto loans and credit card debt to repent. However, having huge deposits and vast networks of branches, they would be worth a lot to investors again, and could raise new capital, repay their TARP contributions and write new mortgages.

The bankers could then go on their merry way, until a few decades hence, they once again determine their salaries should support the lifestyles of rock stars and create financial products to pay them.

My son plans to study finance. He can solve that crisis.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

Is Bank Nationalization Inevitable?

Is Bank Nationalization Inevitable?

By Peter Morici

The Obama administration is on track to nationalize the nation’s largest banks, unless it alters policy and creates a Bad Bank to absorb commercial banks’ mortgage-backed securities.

The housing market and banks are caught in a vicious cycle.

The market is glutted by builders with too many new homes, speculators unloading vacant houses, banks with repossessed properties, and homeowners seeking relief from mortgage commitments.

As housing prices fall, more homeowners with adjustable-rate-mortgages cannot refinance when their rates reset, and others, simply discouraged, default. Supply increases again, perpetuating the spiral of falling home values, mortgage defaults, and bank losses on mortgage-backed securities.

To cover losses, banks should raise new private capital by selling additional stock. But investors, seeing no end to falling home prices and bank losses, have pushed down share prices to levels making it impractical for banks to raise capital.

The TARP has aggravated the problem.

When first approved by Congress, Treasury was to buy mortgage-backed securities from the banks, but it ultimately determined it was not possible to assess their values. Instead, Treasury used TARP to inject capital into banks, purchasing warrants convertible to bank shares, and left banks to work out their problems.

As losses mounted, so did Treasury’s equity stake and involvement at Bank of America, Citigroup and several other banks. Many investors fear sweeping nationalization is inevitable, and have become even more reluctant to purchase bank stocks.

Those fears will continue until the mortgage-backed securities are removed from the banks’ balance sheets or their potential damage neutralized. However, Treasury Secretary Geithner’s proposal to create a public-private investment fund to value these assets and mitigate their consequences is vague and hauntingly reminiscent of the strategy the original TARP was forced to abandon.

As housing prices fall, the banks will have no place to go but the government for the capital to cover losses, and their ownership will pass into government hands; first Citigroup and then others.

Economists, whether employed by banks or the Treasury, cannot reasonably estimate the ultimate value of mortgage-backed securities and the losses banks will take until the number of defaults and foreclosures is known, and that is the trap that snares the market.

The number of foreclosures cannot be divined without knowing how far housing prices will fall, and the drop in housing values cannot be estimated without knowing the number of defaults and how many houses will be dumped onto the market.

A federally sponsored “bad bank,” or “aggregator bank” could purchase all of the mortgage backed securities from commercial banks at their current market-to-market values on the books of the banks. It could determine the number of defaults by performing triage on mortgages—deciding which homeowners if left alone will pay their mortgages, which if offered lower interest rates and moderate principal write downs could reasonably service new loans, and which must be left to fail.

Implementing those standards and necessary mortgage modifications across the entire market would, at once, limit the number of defaults and determine how much housing prices will ultimately fall. That is something the individual banks cannot accomplish acting independently.

The Bad Bank could be capitalized with $250 billion from the TARP, and it could raise additional capital by selling $250 billion in shares, and another $500 billion to $1 trillion by issuing bonds. The commercial banks could be paid for their securities with 25 percent in shares and the rest in cash.

By sweeping all the mortgage-backed securities off the books of the banks and limiting losses on those securities, the Bad Bank would earn money collecting payments on the majority of mortgages that ultimately pay out and sell off repossessed properties at a measured pace. Like the S&L era's Resolution Trust, and the Depression- era Home Owners’ Loan Corporation, it would likely make a profit.

Relieved of the mortgage backed securities, the banks would not be trouble free—they still have auto loans and credit card debt to repent. However, having huge deposits and vast networks of branches, they would be worth a lot to investors again, could raise new capital, repay their TARP contributions and write new mortgages.

The bankers could then go on their merry way, until a few decades hence, they once again determine their salaries should support the lifestyles of rock stars and create financial products to pay them.

My son plans to study finance. He can solve that crisis.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

Radical surgery is required to save this patient

Unless governments stop posturing for the sake of headlines, the full nationalisation of every bank is inevitable

Anatole Kaletsky

If a minor flesh wound becomes infected and is allowed to fester, it can turn to gangrene and lead to crippling amputation or death. This is the situation of the world economy today.

What started as a minor flesh wound - the US sub-prime mortgage crisis of August 2007 - could easily have been cured if regulators, governments and central banks had taken decisive action a year ago, when it was already obvious that this was a problem that private financial markets could not resolve. But instead of taking action - guaranteeing and recapitalising banks, buying-up distressed mortgages and slashing interest rates to zero - governments all over the world essentially crossed their fingers and hoped for the best.

So the wound continued to fester and a year later became full-scale gangrene with the bankruptcy of Lehman Brothers on September 15. That fateful date is almost five months ago and the gangrene is still spreading, while the politicians who could cure it stand around and talk.

This week the talk of a cure was supposed to turn to action. The Obama Administration was expected to announce a comprehensive package to stabilise the US banking system once and for all. The Bank of England was supposed to convince the public that it had finally got the measure of the recession and had the tools to prevent a total collapse in the economy. And Gordon Brown was meant to show tangible results from the hundreds of billions invested in British bank rescues, as the new managements of these dysfunctional organisations committed themselves publicly to start financing the economy instead of just lining their own pockets.

Tragically, however, none of these things has happened. The much vaunted “comprehensive plan” announced on Tuesday by the new US Treasury Secretary, Timothy Geithner, turned out to be nothing but a vague holding statement. The Bank of England's talk of “unconventional methods” lacked the sense of urgency implied by its own cataclysmic forecasts. And in Britain, government action on the banks focused on frivolous headlines about bonuses and personal apologies, while long-promised commitments to increase credit to businesses, homeowners and consumers kept receding, mirage-like, as they have throughout the past five months.

Have we now reached the point where full-scale amputation is the only cure for the potentially fatal financial gangrene? Maybe the only way to avoid a truly catastrophic global depression and trade war is to nationalise every significant bank in America, Britain and the eurozone - since none could survive without government guarantees.

Many economists now take this view. The bitter disappointment over Mr Geithner's announcement, which sent share prices on Wall Street crashing back towards the lows they hit just before Barack Obama's election, now threatens to turn this desperation into a majority view.

I am not yet quite ready to join this growing consensus. For me, dismantling global financial capitalism and replacing it with a neo-Marxist system of capital allocation by the State is too big a mental leap. But the way things are moving, even I will soon capitulate to the inevitability of universal bank nationalisation. The reason is simple.

As the Governor of the Bank of England explained yesterday, neither zero interest rates nor tax cuts can revive economic activity if the credit system remains paralysed. Our politicians and bankers face a simple choice: either normal private banking services are restored quickly or governments take direct control.

I fervently hope that leading Western economies can still choose the former course. But we are losing a race against time. Mr Brown's five-point plan for stabilising the banking system made a lot of sense when it was announced in early January. But since then almost nothing has happened and credit has continued imploding.

The situation in America is even more alarming. Mr Geithner's announcement this week was almost as ill prepared and sketchy as the letter from Henry Paulson, his predecessor, demanding a blank cheque for $700 billion from Congress. Mr Geithner's proposals suggested that he has no real idea what to do. If the US Government has run out of options, nationalising all leading banks is the only logical solution and the sooner the better.

But before jumping to this conclusion it is worth asking why financial policy has been so ineffective. After all, the policies needed to save the private banking system are obvious: stronger deposit guarantees; government insurance for toxic assets and against catastrophic credit losses; partial forgiveness of mortgage loans; binding commitments on lending to non-financial borrowers.

Why, then, have these proved impossible to implement? Until this week I assumed the main reason was incompetence or ideological myopia. But this week's feeble performance by Mr Geithner, along with the frenzy over bankers' bonuses in Britain, suggests a different, and perhaps less intractable, problem.

Reports from Washington suggest that the fears about appearing “soft” on the banks was what prevented Mr Geithner making any serious announcements this week. Similar anxieties about “how it will look in the headlines” appear to be delaying the British Government's decisions on insurance for toxic assets, which have been months in gestation. If this is true, then British and US leaders could yet break out of this self-destructive populism by explaining two simple facts.

First, the public must be made to understand that “punishing” or “bailing out” banks is not the same as punishing or bailing out bankers. Voters hate bankers for lending money so stupidly, but they should remember whose money the bankers lent. If banks were allowed to collapse, then most of the losses would fall on the small depositors whose money the bankers were lending - or on taxpayers who would stump up the cash to guarantee those bank deposits. If the Government supports or subsidises a bank, it is subsidising depositors, not shareholders or bankers.

This leads to the second, more important, point. Whatever money the Government may lose in buying toxic loans or offering banks subsidised insurance pales into insignificance compared with the tax revenues lost to the Treasury if the economy falls into deep recession. Even if taxpayers were to “lose” tens of billions subsidising banking systems, this would be money well spent if it accelerated recovery even by a few months.

For politicians and the media to endanger the entire structure of financial capitalism for the sake of a few populist headlines is the height of irresponsibility. Cut the bankers down to size by all means, but let's not amputate the banks.