Nationalize? Hey, Not So Fast (interesting considerations)

[ProSense]

Economic View

Nationalize? Hey, Not So Fast

By ALAN S. BLINDER
Published: March 7, 2009

THE financial crisis grows weirder by the day. When philosophical conservatives like Alan Greenspan start talking about nationalizing banks, you know you’ve passed into some kind of parallel universe. Why are so many people entertaining an idea that sounds vaguely Marxian?

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Because “nationalization” can mean many things, let’s first clarify what the current debate is about. Don’t think Hugo Chávez or even Clement Attlee. Imagine instead that the government acquires a majority interest in — or perhaps 100 percent of — a bank, wipes out the existing shareholders and installs new managers. Then, sometime later, a healthy bank is sold back into private hands, and we all live happily ever after. At least that’s the idea.

Sounds good, you say? And didn’t Sweden pull this off with great success in the early 1990s? Yes, it did, for which the Swedes deserve praise. But this is not Sweden. Let’s think about some of the downsides to nationalizing banks in America.

WHERE TO DRAW THE LINE? First and foremost, the Swedish government had to deal with only a handful of banks; we have more than 8,300. Numbers matter, because deciding where to draw the nationalization line isn’t easy. Presumably, no one wants to nationalize all the banks, thousands of which are healthy. But where do you stop, once you start?

Suppose we nationalized four banks. Bank Five would then find itself at a severe disadvantage in competing for funds with the government-backed quartet. Forced to pay higher interest rates to attract depositors and other creditors, its profitability would suffer. Soon, Bank Five might start looking like a candidate for nationalization, too — followed by Banks Six, Seven and so on.

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THE CONFIDENCE QUESTION Finally, because nationalization runs counter to deeply ingrained American traditions and attitudes, there is a danger that it might undermine rather than bolster confidence. As I said, this is not Sweden. The Treasury, of course, would never use “nationalization” in public; it would invent some nice euphemism. But the commentariat would not be so constrained.

All of that said, there are arguments in favor of nationalization. Or are there?

One is that financial firms are careening off track, thereby costing taxpayers more and more bailout money. (Think A.I.G.) That’s a big concern — and a major reason to seek quick closure.

But remember, the government already owns shares in many banks, and supervisors have immense powers to influence banks without owning them. According to a banking adage, “When your regulator asks you to jump, your only question is ‘How high?’” Because the Fed can pretty much dictate to the banks right now, what additional powers would nationalization bring?

Another argument is that banks’ dodgy assets are hard to value, making it impossible to know how much capital they need — and probably very expensive to provide it. True again. But nationalization doesn’t make these problems disappear.

If the government takes over a bank, the taxpayers tacitly acquire its assets, thereby inheriting all the uncertainties over valuation. And if a bank has negative net worth when it is nationalized, who do you think fills the hole?

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What’s that? While there are many variants, the basic idea is to break each sick institution into two. The “good bank” gets the good assets, presumably all the deposits and a share of the bank’s remaining capital. As a healthy institution, it can presumably raise fresh capital and go on its merry way as a private company.

The “bad bank” inherits the bad assets and the rest of the capital — which, after appropriate markdowns of the assets, will not be enough. So, again, someone must fill the hole. And, realistically, given the mess we’re in, much of that new capital would likely come from the taxpayers.

Here’s a prediction: We will get to the good-bank, bad-bank solution sooner or later. Wouldn’t it be nice if it was sooner?

Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.

Two Important Statements on Nationalization

[Fovea]

1. I found that stale and unconvincing.

I think when regulators say jump, bankers give them the finger.

[ProSense]

2. Is that why

Citi turned down the jet delivery?

[Fovea]

20. The regulators did not cause that.

Sitting in front of congress and getting broken on the wheel of the MSM did that.

The regulators were too busy letting them eat caviar off their privates to care.

[MannyGoldstein]

6. When The Regulators Say Jump, ...

... bankers say "No, but how about you come work for my hedge fund for a while and we'll pay you tens of millions for a few months "work" like we did for Rahm Emanuel and Larry Summers."

[karynnj]

28. and John Edwards - they were covering all bases

[GarbagemanLB]

3. There are what, only 4 banks that have 60% of the money? That 8,000 figure is bullshit.

[ProSense]

5. From the OP: "Suppose we nationalized four banks." To your point: No,

the 8,000 banks are the actual number of banks. What do you propose doing with the other 40% of banks, the one's therein that have bad assets?



Edited for clarity.

[Telly Savalas]

15. If it's hard to quickly find replacements to the management at nationalized banks

then you keep the current staff on board. If they're not up to the task, then we're screwed anyway.

What do you propose to do with them? Throw hundreds of billions at them every few months and hope it gets better?

[MannyGoldstein]

4. Nationalize All Banks That Are Fucked

Fire the top 10-20 or so execs at each bank.

Roll them into a small number of banks - perhaps one bank.

Sort things out. Make sure that outstanding debts are paid off wisely - only to those who need the money in order not to go bankrupt themselves.

I suspect that this is the only thing that will work. Right now, we're just pouring zillions into zombie institutions that are simply black holes for money - they can't lend, they can only suck cash. And we exert no control over them, so the execs continue to steal every last taxpayer penny that they can stuff into their pockets. The likelihood of a good outcome from this scenario is nil.

Obama needs to jettison his two Republican money people (Geithner and Summers), and put some competent, non greed-obsessed adult supervision into place. And this needs to be done quickly.

[Fovea]

21. but that would solve the problem without the free market

:sarcasm:

It would solve the problem. And I applaud your post.

[FreakinDJ]

7. Interesting use of Dale Carnegie Negotiating tactics

The theory is hugely flawed - but nice delivery

[ProSense]

8. "The theory is hugely flawed" Explain why it's flawed. n/t

[Jim Sagle]

9. It's just a buncha shit.

[FreakinDJ]

12. He led you down the path he wanted to

and AIG is not a Bank - its an Insurance Company

[ProSense]

17. Who said AIG is a bank?

The analogy is about cost to the tax payers from an unknown.

[Abq_Sarah]

10. I'm trying to imagine

The US Government going after people who've defaulted on their loans for property, homes, businesses, automobiles....

Look how completely vicious we've allowed the IRS to become (unless you're a congressman or political appointee). Could we expect that same "burn down the house to collect $25.00" mentality when it comes to collecting loan debts?

[LittleBlue]

11. This argument has already been debunked

Paul Krugman rightly pointed out that the top 4 banks hold over 60% of the market share. "American confidence" is not bolstered by fearing that bank books are fraudulent.

Frankly, I'm shocked someone like Blinder would publish such a weak (and propagandistic) argument. This man is supposed to be a serious academic.

[ProSense]

16. No it hasn't. Everyone saw Krugman's point. In fact, Krugman

hasn't said anything about the other 40% of assets. In the OP, binder address the nationalizing four banks, the number Krugman focuses on:

Suppose we nationalized four banks. Bank Five would then find itself at a severe disadvantage in competing for funds with the government-backed quartet. Forced to pay higher interest rates to attract depositors and other creditors, its profitability would suffer. Soon, Bank Five might start looking like a candidate for nationalization, too — followed by Banks Six, Seven and so on.

[flpoljunkie]

13. Perhaps he's referring to their branches. If so, he should say this.

Bank of America has the most extensive branch locations list; it has over 6,100 locations throughout the United States. There are even more ATM locations for Bank of America. Chase bank has only 3,000 locations throughout the United States. Citi has over 3,000 locations in the United States, with an additional 2,000 in other countries. These three national banks have locations in every state.

http://www.ehow.com/about_4740863_bank-has-branches-all-states.html

[Telly Savalas]

14. Where to draw the line?

You draw the line at banks that have demonstrated through failed stress tests that they are insolvent. There would be full public disclosure of the results of the stress tests so investors would know where they stood. If a bank was healthy, everybody would know it and there would be no threat of nationalization. Borderline line banks could perhaps be subject to the funky private/public bailouts that Geithner is trying to implement for the entire sector. It would still have the disadvantages of Geithner's plan, but on a much smaller scale.

The point is that you make a clear set of standards and stick with them. A major part of the problem is that Paulson and now Geithner are dicking around on an ad hoc basis, so would-be providers of capital to banks aren't sure what to make of the situation.


Domino effect?

Anyone who regularly looks at the stock prices of major banks could tell you the domino effect is already occurring. "Biting the bullet" as Blinder calls it would put a stop to this. The Treasury Department would be making it clear that if you're invested in an insolvent institution you'll lose your shirt, but if you hold stock in a healthy bank then you have nothing to worry about. While the case has been made that gazillions in public funds are needed to keep our financial system from crashing, folks like Paulson, Geithner, and Blinder have never really outlined why it is so crucial for taxpayers to protect the holdings of people who've purchased stock in insolvent banks. In every other sector of the economy when a company goes bust, the shareholders lose.

The Management Question?

This is a red herring. If there are plenty of talented people out there, it's not going to be that big a deal to make changes in critical management positions. If we claim that there's a shortage of talented people, then we're admitting that the people who currently run the banks are incompetent and we're doomed anyway. Moreover, as has been pointed out in this thread, the anti-nationalization crowd routinely exaggerates the amount of banks that will need new staff.

Political Obstacles?

He's got a point. If we try to solve the problem someone might complain, so fuck it -- let's not try.

Confidence Question?

This point simply doesn't make sense. What we have right now is a crisis of confidence which is only being prolonged by the failure to take decisive action. If we make clear who's healthy and who's not healthy, and who will survive in private hands, who will fail, and who will be nationalized, then we take the first steps towards restoring confidence in the system. Until this happens, the uncertainty will continue to cripple us.


In the end of the article Blinder rightly points out that even with nationalization taxpayers will still be on the hook for the bad assets. The difference though is that with nationalization taxpayers can at least salvage the rewards of the insolvent banks' good assets, whereas under the Paulson/Geithner approach we only get the bad and the shareholders reap the rewards of the good assets. "Socialize the risk, privatize the reward" is morally repugnant and it blows my mind that an Obama cabinet appointee seems so committed to it.

[ProSense]

18. ""draw the line at banks that have demonstrated through failed stress tests that they are insolvent"

So how many is that? Everyone seems comfortable nationalizing four or five banks. How many are you referring to?

[Telly Savalas]

22. You tell me.

Do you expect me to have personally conducted stress tests on every bank in the country?

We really only need to focus our attention on banks that are in the "too big to fail" category and there aren't too many of those. Even under an extremely loose definition of "too big to fail", I'd guess that we'd be looking at a few dozen tops.

[ProSense]

23. I don't know. Maybe I'll wait for Krugman to fill in the gaping holes:

That said, some decision must be reached on bank liabilities. Sweden guaranteed all of them. If forced to say, I would go the Swedish route; but of course we can’t do that unless we’re prepared to put all troubled banks in receivership. And I’m ready to be persuaded that some debts should not be honored — this is a deeply technical question.

link

[Telly Savalas]

25. You got me.

Since there's not a consensus on the precise number of banks to nationalize, we're better off continuing to dump several hundred billion dollars into the black hole every few months and hope something will eventually change.

[ProSense]

26. " we're better off continuing to dump several hundred billion dollars into the black hole "

That's a horrible idea. Obviously, people are diligently trying to work through the issues, including the ones raised by Binder and Krugman.

[FrenchieCat]

19. Complex problems don't always have easy fixes....

and I am personally glad that the Obama Administration is taking its time on this. The wrong move could be explosive and nearly impossible to "undo".

[Telly Savalas]

24. Complex problems also frequently require timely action.

It appears that dawdling in the face of the present situation is the wrong move which is creating explosive results that will be difficult to undo. The one thing we've learned so far is that the longer we let things continue in their present state, the worse things are going to get.

Quite a few people have made pretty convincing arguments as to why nationalization is the only sensible response to this crisis. The closest thing to a rebuttal I've seen is Blinder's editorial, and frankly it's lacking.

I still believe Obama has the potential to be one of the greatest presidents in our history, but I'm baffled as to what he thinks he's accomplishing with this. My hope is that Geithner and the gang are privately sold on the possibility that nationalization is inevitable and are just stalling until the stress tests are done in a couple of months to iron out the logistics.

[FrenchieCat]

27. What? How to come up with just the right answer that would solve all of our problems?

in six weeks or less?

I don't think the Obama administration is the problem as much those who got us where we are,
and are now fanning the flames of impatient. And some are taking the bait.

Bet you like fast foods as well, hey?

[Telly Savalas]

29. In those six weeks we've lost roughly a million jobs.

You don't think that requires swift action?