Guardian UK: Our banks are too important to be left in private hands

[marmar]

Our banks are too important to be left in private hands
The case for public ownership has grown overwhelming - but Brown is hamstrung by ideological baggage

Seumas Milne
The Guardian, Thursday 22 January 2009


Once again, the British government is doing too little, too late, to head off the impact of the global financial tornado on Britain's increasingly vulnerable economy. As official unemployment yesterday nudged two million, sterling took another battering and Barclays shares sank yet further, in spite of Gordon Brown's second banking bail-out on Monday. The latest intervention at least corrected some of the most damaging failings of last autumn's rescue: by imposing lending targets in return for insuring the banks' toxic assets, reversing the instruction to Northern Rock to wind down its operations, and turning high interest bank preference shares into ordinary equity.

The result has been to raise the government stake in RBS to nearly 70% - just as it declared the biggest corporate loss in British history and its share price collapsed. But the bad loan insurance scheme is hedged with uncertainty, and no part of this latest package offers anything like the prospect of ending the credit squeeze that now risks turning recession into slump. True, the British government wasn't quite as unstintingly generous to the banks that created this crisis as the Bush administration, which simply handed over hundreds of billions of dollars with no questions asked. But with a bloated finance sector and without the cushion of a reserve currency, the dangers facing the British economy are proportionately even greater.

Instead of propping up private banks with ever more complicated incentives to maintain credit flows, the obvious answer is to nationalise them. Indeed, it is so obvious that all manner of unlikely champions of public ownership are now emerging to demand the government does just that: from Jon Moulton, boss of the private equity firm Alchemy, to Jim O'Neill, chief economist of Goldman Sachs, and former Monetary Policy Committee member professor Willem Buiter - not to mention the Liberal Democrats and a growing army of Labour MPs and trade unionists.

By clinging to a halfway house of hands-off part-nationalisation, the government is getting the worst of both worlds. Billions have been pumped into banks to support economic recovery - and lost as their shares have tanked - but lending has actually fallen, while the cash has been used to shore up their profitability. The banks have incompatible obligations - to maximise profits for shareholders and meet ministers' lending demands - while the government is already effectively shouldering their risks and liabilities (one reason why nationalising the banks should not have the impact on national debt some fear). ........(more)

The complete piece is at: http://www.guardian.co.uk/commentisfree/2009/jan/22/banking-sector-banks-nationalisation

[depakid]

1. The strongest argument here is agency capture

"...as has become obvious during the current crisis, regulators have signally failed to keep a grip on globalised finance. And both regulators and politicians have shown themselves again and again to be ripe for capture by the Wall Street and City interests determined to keep the highest profits flowing."

Paulson's behavior last fall pretty well confirms that- though it was abundantly clear as far back as the Reagan years (and didn't dissipate much if at all during the Clinton administration).

Nevertheless, seems to me that in most cases an RTC type intervention is still the best solution- coupled with investigation & prosecution of both public and private officials who (does anybody doubt) violated existing laws.

Krugman describes it thus:

... a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.

On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.

So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope ... a government bailout.

Why would the government bail Gotham out? Because it plays a central role in the financial system. ... Gotham has to be kept functioning. But how can that be done?

Well, the government could simply give Gotham a couple of hundred billion dollars... A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to ... the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

http://economistsview.typepad.com/economistsview/2009/01/paul-krugman-wall-street-voodoo.html