Today on Meet the Press, Sen. Lindsey Graham (R-SC) reiterated his support for nationalizing troubled financial institutions:
The question becomes, when are you throwing good money after bad? When would it be better to take the bank over, break it up, sell it off, and better manage the bad assets versus just infusing it with capital? That to me is an option, call it what you like, that needs to be put on the table. [...] When the stress tests are administered and you can see that this bank is a zombie bank, I think there’s growing political will that we’re not going to keep throwing good money after bad.
Graham’s message echoes that of Kansas City Fed President Thomas Hoenig, who criticized the Treasury Department last week for nationalizing institutions in a “piecemeal” fashion. Like Graham, he called for taking over, breaking up and selling off “failed institutions that have proven to be too big or too complex to manage well.”
As Paul Krugman wrote, nationalization is a way to make it “politically and fiscally feasible to put in enough capital to revitalize the system.” Indeed, a new Newsweek poll found that 56 percent of Americans favor bank nationalization, but there’s no telling how long the public or lawmakers will stand for infusing funds over and over, while leaving the institutions under private control.
Treasury Secretary Timothy Geithner has said that nationalization is the “wrong strategy for the country,” instead devising a plan based on the potentially faulty theory that the toxic assets plaguing the banks are merely stuck at an “artificially depressed value.” But Graham is right in thinking that the stress tests will confirm the insolvency of some institutions, at which point Geithner’s plans will need a serious redesign.