has an interesting trio of diaries put together today.

"David Sirota: If private insurance is so awesome, why would it lose a competition with  government health care?"

I like it. Even if I had nothin' to do wit' dat.

in the dam. From a Fed president: "If an institution’s management has failed the test of the marketplace, these managers should be replaced." http://www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf

Looking at current economic conditions, Johnson is not optimistic. He closes this piece with these words:

The course of policy is set. For at least the next 18 months, we know what to expect on the banking front. Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I’ve asked). The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails.

The road to economic hell is paved with good intentions and bad banks.

Note that he says he asked. Meaning he has been able to talk directly to some decision makers, at least, and they are set in their beliefs. I don't know if Obama knows any more about the current Big Me$$ than we here do, but I do know what he has chosen Geithner and Summers and will stick with them -- at least long enough to make the mess worse.

The tunneling and conusion mentioned in the title are explained at the beginning:

Emerging market crises are marked by an increase in tunneling - i.e., borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

This is the prospect now faced by the United States.

The doomsday economists seem to be agreeing that the US is acting like an emerging economy. Not good. Your last paragraphs support this view. And was it you who suggested the TARP I (Paulson Fix Is In) last fall was a way to keep the banks private while the Big Banksters were getting out as much wealth as possible for themselves?

The credit default swap market is a modern Delphic Oracle. It speaks loudly and profoundly - these days at reuglar intervals - albeit using somewhat arcane terminology. And after major statements such as yesterday (or perhaps this week in general), it’s worth pausing to reflect on, and argue about, what it really means.

Thursday’s statement, to me, was about US banks (graph).

The risk of default for US banks, according to this market, is rising back towards levels not seen since mid-October. That is striking enough - but remember what has changed since then: (1) the G7 promised not to let any more systemic banks fail, (2) Treasury has provided repeated recapitalization funds on generous terms, and (3) the Fed offers massive, nontransparent funding to anyone in distress. How can it be that the credit market still or again feels the risk of default rising so sharply and to such high levels?

The most plausible interpretation - and here I’m willing to debate what the Oracle meant exactly - is that people expect the government will force the conversion of junior bank debt into equity. The treatment of private preferred shareholders at Citigroup, last week, is seen as the harbinger of further losses for investors.

In a comprehensive systemic clean-up approach and complete recapitalization approach, debt-equity swaps could potentially play a sensible role, particularly in countries without the fiscal capacity to sustain guarantees of all bank liabilities. But if they are done in chaotic crisis mode - as the government appears to be signalling - the additional damage to confidence around the world will be huge.

The events of mid-September 2008 were traumatic and awful to behold. I saw that trailer and I don’t want to see the movie. But it is exactly into that scary future that we now head.

It’s never too late to change policy, to make a difference, and to turn things around. But it is already very late.

Click to The Baseline Scenario for links a ndcomments.

I'm not sure how this was arrived at, but it's somewhat worrisome, no? And it is coming from a pretty savvy economist.

certain circumstances, such as being uncontrollable and so globally connected. What insight, blog master -- brilliant!

Yves discusses his post, including this closing by Wolfe.

The UK government has to make a decision. If it believes that costly bail-out must be piled upon ever more costly bail-out, then the banking system can never be treated as a commercial activity again: it is a regulated utility – end of story. If the government does want it to be a commercial activity, then defaults are necessary, as some now argue. Take your pick. But do not believe you can have both. The UK cannot afford it.

Most commenter's appear very knowledgeable about the inner working of the Obama team. While most of the team is old Clinton hands, Geithner appears to be a Wall Street crony in addition to being an old hand.

Once Obama selected Geithner, the Trojan Horse was in; Obama did it with a clear design. There is no surprise here.

It's our turn to make clear what Obama is doing.