That said… I think the “no second chances” analysis is a worst-case scenario. It’s politically understandable (if regrettable) that Obama doesn’t want to dump his guy and his guy’s plan only two months in. So he gives it a chance to succeed or fail… but if/when it fails, what will be the obvious effects? Yes, time will be lost as lending continues to be overcautious (bad), and thus real businesses in the real economy will have cash-flow problems (also bad)… but these are all indirect effects. The thing people will see up on the surface is that bankers and investors refused to cooperate with a plan that bent over backward to accommodate them. Blame falls on them, and Obama moves on to the next thing. And it’ll at least bolster an argument for even stronger, tougher regulation moving forward. Heck, even Geithner’s testimony in today’s news lays the groundwork for that.

You read Krugman—and lots of other sensible economists—right: there will be no second chance. All the more reason Obama’s reliance on Geithner and Summers is troubling; this may be his Katrina moment, as it were.

Keep in mind that 1) the Democrats should have been able to win the White House running a ham sandwich, so we should not be too impressed that an affable, articulate, intelligent fellow like Obama won; 2) his campaign was run by people far better at their jobs than his economic team is at theirs, people who vehemently disagree with this team’s current approach; 3) the trouble with Obama’s economic policy is not that it is too middle of the road but that it is simply bad economics.

I’m with you guys on this thing, so I’m preaching to the choir here. I share Krugman’s views on what needs to be done (along with his fellow Nobel winner Joseph Stiglitz). Krugman has been pretty dead on about the economy since Bush was put into office. Why should he start being wrong now?

However, some people, I think, are arguing that The Shrill One doesn’t appreciate the political problem the administration is facing here. Thus, the argument seems to go, the Geitner plan is a moderate approach. If it works, everybody’s happy, credit loosens up, the economy starts to recover, and we can avoid the big GOP and media freak-out about SOCIALISM!!! If the plan doesn’t work, then, Obama can say he tried it Wall Street’s way and that didn’t work, so now we have to put several big banks into “receivership” — because he can’t use the dreaded “N” word, “nationalization.” If I read Krugman right, he doesn’t believe Obama will get a second chance. So who knows?

But two things on Obama: (1) I underestimated him all through the presidential campaign, so what do I know? And as far as the public is concerned, polls coming out yesterday appear not to hold him responsible for the AIG bonus mess. I would argue that the public support for him now is an argument for him to be more aggressive than he has been, but, as I said, what do I know? (2) I keep reminding myself that Obama is an establishment Democrat, not the Super Liberal the far right would have us believe. So why should I be surprised when he takes a middle-of-the-road action?

“If Secretary Geithner’s scheme works, we draw the lesson that our banks became too big and we aim to make them smaller relative to the economy moving forward. The regulatory agenda currently in progress – including for discussion at the G20 next week – would do essentially nothing to reduce the political power of big banks. We need simple caps on bank size, leverage relative to the economy and – this is harder – measures of interconnected tail risk (i.e., is everyone making the same kind of crazy loans?). Design a system with this in mind: regulators get captured and super-regulators get super-captured.

“If the scheme doesn’t work, we draw the exact same lesson.”