In the short time he's been President, we've seen a pattern of a man who talks big but passes the buck. Everything he wants to do is someone else's job -- responsibility is passed on to Congress, his own subordinates, or the future (as in, "today we're announcing a major initiative that will accomplish X, Y, and Z. You'll have the details in a few weeks").

Not so with the budget. This budget is something different. Whether anything like it actually becomes law is impossible to say at this point. But it does represent a radical change in its basic philosophy about the relationship between the American people and their government.

I'm one of the many people who have been throwing the phrase "New New Deal" around, although I claim some measure of paternity because I've been using it (and the companion phrase "Great Depression II") since late 2007, which is longer than anyone else I'm aware of.

The just-enacted $787 billion stimulus law is an example of (New) New Deal thinking. But the budget is coming from a different philosophical place altogether. It's not about crisis. It's about where we go from here.

This budget was conceived by a mentality which assumes two key things together: first, that government SHOULD take a positive and sweeping role in setting the national priorities of the United States. (This is something which, for the last thirty years, we've understood as a prerogative of individuals acting in freedom.)

Second, that government CAN take such a positive and sweeping role. As we'll see, the budget assumes at its core that policymakers have the resources to afford an enormous expansion in the scope of government, and the tools to keep the economy from being disrupted by it.

We've seen hubris like this before, and it wasn't during the Great Depression. It was during the Sixties, the heyday of the Keynesian technocrats. Obama isn't thinking about rebooting the New Deal. He's proposing a New Great Society.

The net result of the stimulus package was to direct huge amounts of new money to programs that will be largely controlled by the states. This will certainly result in a lot of wasted spending on things no one needs, but more importantly it will permit strapped state governors to avoid crippling tax increases. Since states and cities don't print their own money as the Federal government does, they generally run into fiscal trouble as the economy slows. Thus the stimulus will act very much like a tax cut.

But Obama's first budget is full of new programmatic spending. Among much else, there is a $643 billion "down payment" on universal health-insurance coverage, new spending on alternative energy projects, and significant budget increases for federal agencies including OSHA and the SEC.

So what the budget is telling us is that nationalized health care and a nationalized "green economy" are on the horizon, and the Federal bureaucracy will be considerably beefed up to handle their new responsibilities.

Gone is any hesitation that the government should do these things, or any thought that they would not necessarily do them as well or as efficiently as the private sector. This is the philosophical shift contained in this moment, and it matches that of the Great Society.

One senses a broad new impatience with the approach of the past two decades, which held that government could achieve its objectives by modulating the incentives presented to private actors, and the "magic of the market" would do the rest. This budget says To heck with that, and just plans to do things itself.

The other large new idea in this budget relates to what the President calls "fiscal discipline." This is the quaint idea that you should pay for what you spend, and more specifically that you should prefer to pay for it with current income rather than with borrowings.

For two decades, the United States has benefited from a singular (and somewhat mysterious) desire by global investors to lend money to us at extremely low real interest rates. This has fueled a boom in consumption and investment in both the private and public sectors, but the money spigot has been shut off to the private sector.

But the Federal government (and its extensions, including Fannie Mae and Freddie Mac) continue to have access to plentiful amounts of borrowable funds, from the rest of the world and also from Americans unwilling to buy into the stock market. It's no longer fully true that the interest rates at which we borrow are historically low in real terms. But that doesn't mean the money is unavailable. We should have no trouble continuing to borrow money against Obama's budget priorities indefinitely.

However, he wants to step the borrowing down as quickly as he can, and replace it with much higher taxes on high incomes, business income, and returns on capital. He also wants to impose a large economy-wide tax on energy consumption (the "cap-and-trade" regime).

The problem, however, is that by so severely penalizing any activity which produces returns on investment, Obama is shooting right at the heart of the economy's ability to return to robust growth. This is a fatal flaw.

So what is the result when you depress organic economic growth by taxing its drivers, but simultaneously import and borrow less capital? You get a smaller economy overall, or at least one that strongly underperforms its capacity.

But that would also imply that Obama will need to scale back his ambitious plans for national health care, a green economy, and a larger government headcount. Unless he's willing to do that, he will necessarily need to continue borrowing, and fiscal deficits will remain very high indefinitely. The combination of high fiscal spending with low organic growth means that we face an inflationary future (more dollars chasing fewer goods).

This was the same flaw that defeated the Great Society. This was a word that President Johnson first used in 1964, and became a legislative program in 1965. At the time, the US was facing grave social problems and an incipient war in Vietnam, but a relatively healthy economy. The question economists posed was whether we could afford guns and butter, or a costly war and a vast expansion of social spending. The answer was judged to be yes.

But as early as 1965, the first signs appeared of an inflationary tendency that persisted until it was forcibly killed (at the cost of a brutal recession) in 1982. Stagflation (high inflation with low growth and high unemployment) was the fatal flaw that defeated the Great Society, dogged the Seventies, and overshadowed the tenure of President Carter.

But today, we don't have the same benign economic conditions that prevailed in 1965. Instead, we're facing the worst financial and economic crises since the Thirties. And into this environment, the President boldly and innocently proposes to enact a New Great Society, with broad new spending and powerful disincentives to economic growth.

It's hard to expect a better outcome this time around.

Something quite major happened in finance this morning. All week, officials like Ben Bernanke and Tim Geithner have been hinting that nationalization is not the way to save the banking system.

So today they only nationalized Citigroup halfway.

As part of the TARP plan, and also in a supplemental purchase, you the taxpayer have purchased about $45 billion worth of convertible preferred stock in Citigroup. Today, the government has made a deal with Citi to swap about $27 bn of that preferred for common.

Since the entire market value of Citigroup's common stock was slightly below $27 bn as of yesterday's close, the deal amounts to creating about as much new stock as existed beforehand. So each existing share is now worth about half as much.

And in pre-market trading, they're down just about... half. See, financial modeling works after all. The massive dilution and the fear of more to come (possibly affecting other banks) is weighing heavily on stocks this morning, and they will open sharply lower.

I don't have time now for a fuller explanation, but you're probably wondering why they did this after a week of saying nationalizations are bad. I would say it's because of the unique character of Citigroup.

Citi went farther than anyone else in this direction and thus is now perhaps half bank and half broker-dealer.

Ok, hang with me, this gets a bit tricky. A commercial bank doesn't necessarily need to mark their toxic assets to market if their intention is to hold them to maturity. Therefore, you could make a case that, based on reasonably financial accounting, banks like JP Morgan Chase are indeed undercapitalized but NOT insolvent.

Citi is different, because so much of what they do involves securities held for sale that have now landed on their balance sheet, and because of their large trading operations. It's consistent to argue that Citi's assets should be aggressively marked to market. And on this basis, Citi is unquestionably insolvent.

Today's move was only a matter of time.

To speak of these priorities in these terms is to see how facially incompatible they are. That's simply because ideologues of the right or the left will consider one of the two priorities to be the only one which matters, and the other one will take care of itself.

The mistake that people on the right make is that markets, left fully free, will automatically take care of everyone's material needs, and that government's most valuable contribution will be to get out of the way. On the left, people assume that social justice is a simple matter of redistributing wealth from those who earned it to those who deserve it, and there's more than enough wealth to go around.

So it's perhaps novel to speak of achieving both of these priorities together, given that so many people are so firmly committed to one at the expense of the other. But we stand at a moment in history when it's critical to hold both opposing ideas firmly in mind, to see how they interact, and to see how we can indeed achieve both.

For the next several years, we're going to be talking about how to divide the economic pie up more evenly. Only government can do this, since government at root is the sum of the public actions of all the people. Government isn't evil. Government is us.

This is a conversation that's entirely congenial to the elites who make up the political and journalistic classes. Those of us who labor in business and finance, however, see the other side of the coin, which is that the pie needs to grow.

This is a matter of basic logic. There's a balance point at which redistribution becomes too large, as a proportion of income, to make it worth taking the risk of producing very much of anything. Redistribution reduces returns on investment, in effect acting like an increase in interest rates. The pressure from increased demand for goods and services does NOT encourage new production, contrary to Keynesian dogma. The only ways out of the box are to redistribute less, or to produce more. Producing more is the only practical choice today.

This much was evident two years ago, before the current crisis ignited, as the public obligations to a large and growing cohort of retirees was the proximate problem. Today, this problem is bigger than ever, as the private savings of those soon-to-be-retirees have been decimated in a grand capital-markets bonfire. And we have less to work with than ever, as the same bonfire has consumed literally trillions of dollars of the world's financial capital.

The financial and economic problems will need a socialized solution, too. They're simply too big for the private sector to solve on its own, in a reasonable amount of time. Too much capital has been lost, either outright, or by passing into the control of surplus countries that would rather save than consume and invest.

Soon enough, you won't be able to escape the talk of "grand bargains." This discussion will be framed as a dichotomy by the people who lead the discourse today, and who (whether or not they, and we, admit it) are polarized ideologically. For that reason, it's going to seem like an impossible conflict which one side will need to win at the expense of the other.

To wit: "We will need to cut some Social Security and healthcare benefits, in specific ways that avoid disadvantaging the less affluent. At the same time, we'll need to raise taxes significantly on the wealthy and the productive, who will be called upon to do their fair share."

And another: "We will not be able to meet our obligations to our children and grandchildren to provide them with a future that's free of overwhelming debt, unless we take some very significant pain right now. Let's decide together which among us will need to take that pain. Let's start with those most responsible for the crisis."

If the debate which we are fated to have unfolds along these ideological lines, it will tear the country apart. We'll be sowing the seeds of an efflorescence of political radicalism similar to that of the mid and late Depression years.

What's the key to an understanding of the whole picture that looks past the standard ideological boundaries? We need to understand our political economy not as a mechanism for distributing wealth, but rather for allocating the economy's current production of goods and services.

Every individual, and certainly every highly-motivated individual determined to obtain above-average financial success, seeks the accumulation of savings and investments that will give him a large amount of future consumption. But like it or not, what society ultimately needs is to generate enough current-period production to adequately meet the needs of everyone. Anyone who imagines that the productive and the wealthy can continue to take a large share of a shrinking pie needs to reread the events of 1789. This position has law, legitimacy and morality on its side, but those are precisely the virtues that are threatened as social cohesion frays.

It might have seemed two years ago that all we needed to solve the problem was to get out of the way and let the wealth-creators do their thing. And if the world of two years ago were today's world, I'd be arguing that case. What changed? We found that we our high levels of consumption and investment were enabled by extremely high levels of financial leverage, a systemic underpricing of investment risk by every investor in the world, and the willingness of emerging countries to trade their production to us in return for the illusory security of central bank reserves.

None of those factors exist in today's world, and it won't do to suppose that "getting government out of the way" will bring any of them back. For better or worse, we need to do two things simultaneously: balance the distribution of goods and services so as to avoid massive human suffering; and find a way to increase the amount of goods and services available for distribution.

There's no shortage of well-debated ideas for achieving the first of these two legs of the grand bargain. What's not so clear is how to achieve the second.

It simply will not do for anyone to speak in terms of raising taxes on wealth and productivity. By destroying private incentives to produce and invest, this is the way to ensure misery ahead, and quite possibly revolution. This is a mistake that the current Administration and Congress are in grave danger of making.

We must find ways to encourage private-sector actors to step up their wealth-producing activities. In this time of low real returns on capital, that necessarily implies improvements in productivity. It also requires strong, positive efforts by government to reassure private businesspeople, and also our trading partners, that government won't distort their incentives in the future. You simply can't do reasonable business planning in the presence of a government that's committed to "bold, persistent experimentation."

It's inescapable that the government will need to stabilize the financial system. What this crisis demands can't be done by the private sector. The great challenge will be to do that while simultaneously preserving incentives and opportunities for business to work and thrive when the dust settles.

It's a proposal by the Treasury for a radical way of restarting private participation in credit markets. I'm only going to give you the barest outlines of this with minimal analysis, because I can't be sure the Treasury really means it.

For many months now, "securitizations" have come to a near-standstill. That's the much-maligned process through which whole mortgages get "sliced and diced" into mortgage-backed securities and sold to the world's investors.

Through a different but analogous process, other kinds of consumer loans are also securitized: car loans, credit cards, and student loans. (The goal is always to give an investor a piece of paper with a credit rating, a semi-annual coupon payment, and a maturity date. Mortgage analytics and risk management are more complicated, but beyond that, the process is the same.)

Securitization matters because banks can't provide credit now that most of them are so far undercapitalized. Securitization is an alternate process through which investor funds are channeled into the consumer credit markets.

So since the Treasury can't figure out how to get banks lending again, they decided to look at securitization instead.

What's missing from the securitization market today is leverage. There is some theory that a fabulous amount of money (hundreds of billions, at least) is sitting on the sidelines, waiting for an opportunity to flood back into the market. But it can't purchase asset-backed securities (and thus revive consumer credit) without financing.

Up until 2007, such financing was readily provided by banks. We already know about what happened to them as a result. They got their heads chopped off.

So now, the Treasury is proposing that you, the taxpayer, should be the source of leverage for investors who want to buy newly-issued asset-backed securities. If the world's banks can do it and only lose two to four trillion dollars in the process, why not you too?

The way this would work is that an investor would put up anwhere from five to fifteen cents on the dollar to buy an ABS (backed by mortgages, credit card receivables, student loans, auto loans, whatever). And the Treasury would put up the rest at a low interest rate.

But there's an enormous difference between this process, and the one that all-but-destroyed the world's banks: rather than forcing investors to take any losses on the ABS, all losses would be borne by the taxpayers.

We're giving the world's investors the same bubble-era opportunity to make double-digit returns on their investment, with an infinitesimal amount of risk. It's as if the government wants to save the economy by triggering another asset bubble.

You might think this is just stupid. I think it's far beyond stupid. I think it sounds just as wantonly destructive as if the government had deliberately chosen to release bubonic plague into the streets. That's why I can't believe I'm reading this right.

But let's go back to the reporting. Why is this appearing only in one place? Is the Treasury trying to manage the economy by press release? Did they float this as a trial balloon to see how the public would react?

But why do that? The top people at Treasury can get the world's best experts on the phone any time they want. Even more, they can get the world's most powerful market participants and ask their advice.

Or can they? One thing about Henry Paulson: like him or not, he had a personal relationship with enough of Wall Street's movers and shakers to know what was really going on at all times. It's a measure of the difficulty of the challenge facing us that, with all that, he didn't come up with better solutions.

But Tim Geithner so far isn't inspiring that kind of confidence. Why is a major, major idea being floated to New York Times reporters like this?