"If Not Nationalization, Then What?"
The question that everyone seems to be asking about the Obama administration’s plan for the financial system is: “Should the United States nationalize some banks?”
There’s been a chorus of calls for nationalization — from Paul Krugman and Nouriel Roubini to Alan Greenspan and Lindsey Graham — which thus far the Obama administration has resisted. As Roubini noted, however, the “stress test” that Treasury Secretary Timothy Geithner proposed in his financial stability plan naturally leads to nationalization:
[T]he reality is that Mr. Geithner is going to confirm the insolvency of the financial system. Once we face this truth, there really isn’t much left to do but nationalize. We are not talking about the government operating the banks for the long-term. But, as was done in Scandinavia in the early 1990s, we are talking about orderly clean up, then reselling the banks to private investors.
Of course, there is the question of the political viability of nationalization. Obama has argued that “America’s different,” and won’t stand for nationalization. And as The Hill noted, federal ownership of troubled banks would play into false claims that Obama is a socialist.
But if not nationalization, then what? Geithner’s public-private investment fund may get toxic assets off the banks’ books, but nationalization is a more straightforward process, and doesn’t depend on Wall St. being willing to buy the junk currently clogging up the banks. And the longer nationalization is delayed, the longer the solvency of the entire banking system will be in question. Thus, more good banks will get dragged down into the mud with the bad.
As Michael Hitzik wrote of the banks, “We bought them. We own them. The only problem is that we’ve failed to exercise our right to control them.” Indeed, another benefit of nationalizing is the opportunity to wipe the bank’s management slates clean. But if nationalization occurs, it needs to be done in a quick manner. There’s danger in allowing the banks to sit on the government’s hands for too long; “prolonged government intervention in the Indian and Chinese banking systems led to major inefficiencies, which stymied economic growth.”
The administration is currently reassuring banks that nationalization isn’t coming. As Matthew Yglesias wrote, “If I were Tim Geithner, I would keep offering these reassurances to executives at large banks right up until the minute I nationalized the first one.” But if the administration is committed to a plan that doesn’t involve nationalization, then it should lay that plan out, because it’s beginning to look like nationalization is where all roads lead and the public needs to be educated about the alternative.
Cross-posted on The Wonk Room.
The New York Times reports today:
The Obama administration has provided few details about its plans to shore up troubled lenders, sowing confusion in the markets and inside the banks about its intentions.
With so much uncertainty, some investors are abandoning banking shares, fearing shareholders will be wiped out if the government seizes control. The worry, investors say, is that Washington is running out of time and options.
“Banks live on confidence, and there is precious little coming from the new Treasury secretary,” said Gary B. Townsend, a former federal banking regulator who runs his own investment firm, referring to Timothy F. Geithner. “We are getting only confusion.”