“People who should know better have been speculating publicly that the government might need to nationalize our largest banks. This irresponsible chatter is causing tremendous turmoil in financial markets. The Obama administration needs to make clear immediately that nationalization — government seizing control of ownership and operations of a company — is not a viable option.
Unlike the talking heads, I have actually nationalized a large bank. When I headed the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, the FDIC recapitalized and took control of Continental Illinois Bank, which was then the country’s seventh largest bank…..”
William Isaac , who actually did nationalize a bank, says don’t do it, at the Wall Street Journal.
Comment:
Glad to see confirmation for my argument (I’m always a little nervous – who wouldn’t be? – criticizing highly credentialed people like Paul Krugman). But sometimes pundits, like emperors, really don’t have clothes and you have to call them on it.
Any one can see that Sweden is too different from the US to make a valid comparison.
Anyone can also see that nationalization doesn’t automatically get rid of the pain. It might (or might not) postpone it. In fact, it’s likely to make it worse, in the opinion of many people with real world experience in banking and investment, not just theoretical expertise (which is all most economists have).
It’s also interesting to me that all those austerity measures which IMF experts thought were just fine for Asian and African countries are off the table in the US. That tells you how bogus these debates are. No one is even considering letting any of the banks go bust. The only possibilities on the table are how to give government money to them. The three options being debated are:
1. Infuse capital on an ad hoc basis by applying certain tests to decide which and when (Obama administration), assuming the system to be fairly sound.
2. Infuse capital without taking the banks over, by buying their bad assets at higher than market value or by insuring them, so they get cheap capital
3. Infuse capital by taking the banks over, firing managers, transfering off the bad assets (where? to whom? how?), recapitalizing them and then selling them back to the private sector.
Now, 3 is supposed to be so much better for tax payers than the other 2, but without access to details and transparency, there is no guarantee whatsoever that it will be. It would depend on what happened to those bad assets. In fact, the additional bureaucratic measures involved look to add their own additional burden.
The main issue, as I see it is, is monopoly and corruption. In the recent past, we’ve seen that taking-over or infusing capital into selected banks has taken place via other favored banks. There’s evidence (I’ve posted on this on Wachovia and others) that the rescues were actually used to funnel government money to the rescuer bank. I think the Lloyd’s-HBOS deal was something of that kind.
Not on the table at all is the simple free-market solution: let the banks go under. Let them liquidate. If necessary, adjust laws and regulations to make the process as quick as possible so it doesn’t clog up the courts. Perhaps also adjust insurance requirements for a temporary period so that the impact on businesses is reduced.
There will be pain. But there’s going to be pain regardless of what proposal goes through. The bottom line is there was a party and now there’s a bill – and no one wants to pay. But that’s not how the real world operates. Someone will pay.The only question is will it be the people who incurred the bill or the general public? The rest of the talk about “too big to fail” “the economy will collapse” etc. are all obfuscations, projections and self-serving hypotheticals….