Obama's Reflexivity Problem

Today, the market pummeled banking stocks as it worked to come to terms with the increasing prospect of a bank nationalization. In a sort of self-fulfilling prophecy, each drop in the ticker makes a bank nationalization that much more likely. 

However necessary, a bank takeover may become, it represents a political scarlett for the President, who runs the risk of being branded a 'socialist'.  Indeed, George Soros may be the only liberal smiling at the moment, as the "reflexive" phenomenon taking a place -- a sort of negative feedback loop -- is the premise of many of his most successful market plays.


Obama's current tack seems to be to deny the possibility of a grand takeover and hope Presidential reassurances are strong enough to beat back the force of the market herd.  This is precisely the sort of misplaced hopefulness that the President has been wise to avoid thus far, and it's not likely to succeed in doing anything but proving him to be a step behind the market.  Instead, he should be preparing a grand argument for a swift and strategic intervention -- reframing nationalization as a reasonable step in extraordinary times -- and pointing to the precedents that underscore that fact.  To do anything else at this point is simply tilting at windmills.

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