I am told by a currency trade expert with connections to a Gulf royal family, that there is a small but growing faction within Obama’s immediate circle arguing that the insolvent Banks should be allowed to die, euthanized by market discipline. Of course, credit will be needed by business and consumers, so the U.S. could then set up a temporary “Reinsurance Bank”, open to subscription by private and taxpayer interests at identical terms, to guide the U.S. economy from its current all time high debt to GDP ratio through the debt deflation process necessary to get it back to aggregate solvency, something that is likely to take a minimum of a decade and may take much of the century. The insiders who are pushing for this suspiciously free enterprise solution to the Crisis base their arguments on complementary economic and political analyses.

From the economic standpoint they point out the obvious: There’s no such thing as a free lunch. The total amount of garbage assets on the books of the Banks is essentially unknowable. Michael Hudson, Bloomberg and others put at $9 to $12 trillion the sums already pledged/paid in loans or insurance by the Fed, FDIC and Treasury to bail out the Banks; global reaction shows that this amount is not even in the ballpark. If the garbage assets cannot be unloaded at close to claimed value onto unsuspecting aliens from the Planet Hayek, then someone has to pay the price of the write-down. The choices are two: the shareholders, creditors and bondholders of the Banks in the form of (largely, tax-deductible) losses, or the American Taxpayer in the form of wealth transfer to the rich and reckless. If the latter, then the mechanism for doing that will sooner or later involve the printing of tens of trillions of dollars, all in the form of national debt, which will as a consequence double, triple, or even quadruple. This would make the stimulus package that has Republican operatives howling about the future devaluation of their children’s trust funds seem like small beer.

From the political perspective they point out another homespun truth: You can’t fool all the people all of the time. These newfound Libertarian Democrats know perfectly well that the original plan was to do just that, i.e. transfer the cost, as discreetly as possible from the Banks to the taxpayer, and indeed while the sleight of hand of Paulson/Geithner Phase One was going on, the Fed was merrily making available the first $2 trillion in emergency loans – that amount may now be up to $6 trillion – to the Banks against collateral that even Bloomberg’s lawsuit could not compel them to reveal, but the general quality of which can be divined by all but the militantly unreflective. While the Fed’s actions were known to specialists, the Bloomberg lawsuit brought the matter to the attention of a larger, if, thanks to the somnambulistic Free Press, still not general public. Thousands of blogs and an avalanche of circulating emails later, and this kind of backroom rescue of the Banks is now off the table, no doubt to the deep chagrin to the Banks and to the Rubin faction within the Obama Brains Trust.

The politics get even murkier: Had the Fed’s discreet emergency loan program been able to go on sufficiently long to rescue the banks – albeit at the cost of the eventual near-destruction of the real economy – then the partisan positions would be simpler: Democrats could say that it all happened under Bush, while Republicans, admittedly in a weaker position, could suggest that they were not Bush and anyway Obama had signed off on all that during the infamous McCain stiffs Letterman period and drop dark hints that there was some kind of a nod and wink deal between big Finance and the incoming Administration, perhaps going back to Larry Summers’ flight back from the Democratic National Convention in the Citigroup private jet.

Now it’s all different and as more than one commentator has pointed it, we get to see the problem of having two viciously competitive parties representing the same essential interests. Republicans have very little to lose in watching Obama struggle with this issue, above all since “nationalize” may well be the worst N-word in the American language and nationalize is what Obama’s progressive brigades want him to do, while those who paid for his campaign – paid when it counted, in credibility, back-channel endorsements as well as treasure – still are counting on collecting their get-out-of-jail-free cards. The Rubin Gang within the Brains Trust are of course still wedded to the “too big to fail” hypothesis, and point out that the far too small to be effective stimulus bill along with the frozen credit markets virtually guarantees that things will get much worse before they get better and that, say, a few months along down the road paying off the Banks’ bad bets, even at the price of doubling or tripling the national debt will seem suddenly palatable to virtually the whole world.

To the economic argument that “too big to fail” is the wrong lens to use and that an appropriate analogy for the moribund credit system is that of a crashed car whose repair cost is going to be much higher than its replacement value, the Libertarian Democrats add that even if the country could be made to swallow Bankers’ Bailout in a few months’ time, the chaos in the economy would still mean that the Republican attacks would be unrelenting and that the mid-terms would spell disaster for the Democratic Party (and usher in an era in which Republicans suddenly rediscover the vital importance of limits to Executive Power).

The Libertarian Democrats also concede that the biting the hand that pulls the strings will unleash a tide of political fury – someone on Fox will surely find a way to call letting the markets decide the fate of the Banks “a Communist plot” – of a level hitherto unknown in American politics and that that, too, could spell disaster for the Democratic Party. But even if the politics argued in favor of the Bankers’ Bailout, better, they say, to go down to defeat saving the nation then to hold on to power destroying while its economy.

Beyond the conversations that are going on within the Brains Trust, my trader friend draws attention to another fact: the U.S.’s creditors have no permanent interest in the welfare of the Banks and Wall Street per se; what matters to them is the long-term stability and solvency of the U.S. economy as a whole. If the cost of saving the Bankers risks turning holdings of Treasuries into monopoly money, then Beijing, the petro-kingdoms and others are no doubt already making sure that their arguments in favor of the euthanasia of the Banks are being heard by the Obama administration.

I don’t really know if my friend is right that this debate is going on around Obama. But I certainly hope he is.

I wonder where that Amerikan Pride index is hovering at now?

People’s priorities (in general) in the US have been blinded by the immediate satisfaction of capitalism for decades — shop till you drop and spend, spend, spend on frivolous distractions. Now that the ship is sinking, priorities will have to be realigned — sink or swim. Better have those life preservers handy.

What’s coming is inevitable, hopefully the people haven’t forgotten how to produce their own food.

It’s time for Obama to pay back all his wealthy supporters who funded his campaign, no sense in waiting or hoping on assistance for the people.

Best to all.