I’d say Simon Johnson has it about right when he says the G7 are asleep at the wheel.  A combination of mild squabbling and feel good statements about how wonderful Geithner is can’t conceal the fact that they don’t actually have anything like a unified plan of action

Part of the issue seems to be that no one is taking control and leadership.  Geithner’s plan is too vague to point the way for other nations, or even for the US.  If he’s really planning on taking bold steps such as putting banks that fail his stress test into receivership or nationalizing them, that’s simply not clear from his proposal. 

Nor have any other of the G7 nations been acting in more than an ad-hoc fashion.  No one really has a plan, and everyone is muddling through because no one is willing to admit the simple fact: that the majority of the world’s largest banks are bankrupt.

The Geithner plan may back into this admission through its stress test, but who knows? As it stands right now, the plan seems to actually say, in effect "we’ll use the stress test to figure out how much money we have to back the bank with":

While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital.

If that’s an all out commitment, something Geithner appeared unwilling to commit to during Congressional hearings, then it is actually a plan (a bad plan, but a plan).  If it’s not an absolute commitment, then it still leaves the fate of bankrupt banks up in the air.  

The other question is transparency.  The Geithner plan talks a lot about it, but it’s unclear whether the full results, including methodology of the Stress Tests, will be made public.  If they were, that would go a long, long way to reassuring private funds.  The problem right now with ponying up money to help a bank is that you don’t know if you’re getting a bargain basement price for something which could recover, or a pig in a poke.  That won’t change unless you have real transparency. 

The problem with real transparency, though, is that it’ll also make clear which banks are effectively bankrupt, and could cause a run on them.  (Which is why you should declare a bank holiday and have the FDIC lined up before releasing the results).  But stress tests which aren’t made public won’t reassure investors, they just amount to the Treasury saying "trust us" and at this point no one does.  Full numbers including methodology have to be released or the stress test will be useful only to the Treasury and the Fed for their operations and not to private capital.

Geithner also wants to take preferred shares instead of common shares in exchange for whatever aid he gives banks.  Again, this is a refusal to deal directly with the problem.  The problem in this case being bank management: a corporation which is bankrupt should not keep the management which bankrupted it, but so far the government has mostly refused to wipe out the financial executive class. 

Likewise it fails to look squarely at the problem of returns to taxpayers. If the government is going to back up insolvent banks to the hilt, it might as well take common shares or outright nationalize the banks in question, so it has all the upside of any later appreciation.  Doing anything else means taxpayers won’t get as much money back as they could otherwise, and indicates that looking after bank executives is still a significant concern, competing both with returns for taxpayers and simple effectiveness. 

If the problem is banks not lending, as we keep being told, the simplest way to make sure they lend is to put our own CEOs, boards and executives in charge.  Once they’re in place, if the bank can conceivably lend, we can be sure it will.  This cuts through the bank blackmail of "take all our bad debt of our hands, or the economy gets it" because the executives making the blackmail threat will be gone.

One of my longest running rules of analysis has been the "will they do what is necessary" rule.  Not "is it possible to fix it" but "is anyone in a position of power willing to do what it takes to fix it?"  So far we have a stimulus bill that is too small, a G7 that is dithering and a Treasury secretary unwilling to beard the bank executives to save the country.

In the Great Depression the country suffered years of hand wringing and ineffective policy before it elected FDR, who was willing to do what it took and had a Congress in which both parties were begging him to do so.  I hope we aren’t going to have to wait that long this time for those in power to take the bull by the horns and start putting the country and ordinary citizens first.