Nationalization

Nationalization. Lots of people embrace the concept -- unfortunately, Barack Obama is not among them. He considers the idea of nationalizing the too-big-to-fail banks to be "simplistic." But is it not possible for a course of action to be both complex and foolish?

Here's "Nationalization for Beginners," from The Baseline Scenario. Writer James Kwak gives us five meanings for the word:

1. Owning more than 50% of the bank, by which people typically mean owning more than 50% of the common equity

2. Consolidating the bank onto the government balance sheet

This is what occurred in Iceland.

3. Turning the bank into a government agency

When Republicans decry nationalization, they usually try to make you believe that this is the only definition of the term.

4. FDIC-style conservatorship

This is how Dems define the term.

5. System-level nationalization

This is sort of where we're heading right now, like it or not.

Instead, the government, primarily through the Federal Reserve, stepped into the breach. The government is the only source of capital for the banking system; it guarantees a large proportion of bank liabilities, including virtually all deposits and new bank debt; it implicitly guarantees all large banks under the Too Big To Fail doctrine; it ensures the liquidity that keeps the system afloat, both by providing cheap money and by lending against illiquid assets; and it has stepped up buying of various securities on secondary markets in order to encourage lending. In short, the government is where the money comes from, and the government decides on a high level where it goes, through capital injections, loans, and securities purchases. And the government bears the vast majority of the risk.

I prefer option 4. How about you?

...I think that nationalization should be on the table, rather than being written off as some fundamental denial of the laws of physics.

Alan Blinder argued against nationalization in the NYT. Here is the Naked Capitalism rebuttal:

The normal remedy for failed businesses is to let them fail. But we don't do that with banks. The big fear is depositor runs, and if that were to occur on any scale, it would indeed bring the entire system down.

Quite a few readers have said something along the lines of: "I'm opposed to nationalization, the banks should be put into receivership." Hate to tell you, they are the same thing.

John Kay of Financial Times gives a rationale for nationalization that I find damn near inarguable:

Governments have attempted to impose the first element of nationalisation (ownership) without the second (ultimate control and accountability). But such a separation is neither desirable nor workable for long.

Vikram Pandit, Citigroup’s chief executive, poses the issue in stark terms. When the US government announced further support last week, he was reported as telling analysts: “We completely remain in day-to-day charge of the company. We are going to run Citi for shareholders.” But if I were a US taxpayer, I would ask why I had provided $45bn (€36bn, £32bn) to a business that was going to be run for shareholders, especially when the current value of outside equity is barely 10 per cent of my own contribution. I can think of no good answer.

So when Mr Pandit says that the government’s injection of capital will not change strategy, operations or governance, I would e-mail my congressman to ask why on earth not, and tell that congressman what changes I did expect. The company should divest or close activities not related to its essential public function. If Citigroup wants to continue to engage in proprietary trading, it should raise capital for the purpose from private sources.

Salon's Mike Madden thinks that nationalization in one form or another, is inevitable.

But to Republicans, the details seem beside the point. "Nationalization" is just another way to make voters fear Obama's stewardship of the economy.

Whether that scare strategy works politically is hard to gauge. But what Republicans apparently believe will work economically would probably frighten even more people. Instead of nationalizing banks, they want to let them fail.

Dems don't favor going down that route, for the obvious reason that a ruined economy would turn America into something like the barbaric might-makes-right society visited by Raymond Massey in Things To Come. (Sometimes I think conservatives want that outcome.)

Yet nationalization remains a dirty word in Obamaland:

"This is a very complex set of problems, and bad decisions can result in huge taxpayer expenditures and poor results," President Obama told the New York Times on Friday, bringing up -- and then shooting down -- the idea that bank nationalization would save the financial sector. Treasury Secretary Tim Geithner told PBS's Jim Lehrer last week that nationalization is "the wrong strategy."

As I noted in a previous post, the Obama administration isn't big on explaining why they feel that nationalization is wrong. But Ezra Klein may have stumbled upon the reason. Here, he discusses a radio interview between Terry Gross and Simon Johnson, the former research director of the IMF.

The problem in America, he says, is that the regulatory apparatus is largely made up of bankers and people who are sympathetic to bankers. "On [Geithner's] board, for example, back in the spring was Jami Dimon, head of JP Morgan. And the way, of course, in which Bear Stearns was rescued back in the spring was being sold, at what many thought was a very low price, to JP Morgan. It's a very strange world in which you can sell, over a weekend, such a valuable asset to someone who's on your board of directors, and nobody even raised an eyebrow about that."

Thus, we find ourselves in a strange situation where we nationalize bad assets while the banks do not go into receivership. Instead, they continue to be run by the same people who got us into this mess, and who have little incentive to reform. Screw the taxpayers who must fund the bad assets.

Terry Gross goes on to ask if Johnson has ever advised a country that successfully solved a banking crisis by buying the troubled assets. "No," laughs Johnson, "I don't think anyone has ever bought troubled assets like that. It's a terrible idea, by the way. If you look at what Sweden did and talked to the people who managed their bank takeovers, they will tell you it was very hard to value the main assets held by the banks. it was real estate, and real estate always does what it's doing now. It becomes very illiquid. It's very hard to know what is the market price. That's the problem.

"But Mr. Paulson and Mr. Bernanke have presented this as 'oh my goodness, we've never seen this before, the markets have dried up, it's crazy and temporary and will only go away if we pay top dollar for these assets.' That's not true. This happens all the time in financial crises. You always get illiquidity. You always get the value of assets becoming questionable. What you do is the takeover and the nationalization and the re-privatization of banks and while you're doing that you take the really bad assets off the balance sheets and create an asset management company -- now being called a 'bad bank' -- that's a separate entity and does loss minimization. And that was done by the people who ran the Resolution Trust Company in the 80s. They did a great job, by the way."

Oh, those silly Swedes. Oh, those silly RTC guys. How could they be so simplistic?