The N-Word

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All the talk about the stimulus bill shouldn’t distract attention from the fundamental need to get the banking sector sorted out. Absent a working financial system, it’s extremely difficult for businesses to expand even when they have good ideas and viable market opportunities. That makes it impossible for the economy to recover. It’s always the case that some firms and, indeed, some whole sectors are doing poorly. But during good times other firms and other sectors are doing well, so people who lose their jobs can get new ones. Without credit, that doesn’t work. And we’re still not out of the foods on the banking side. Felix Salmon says it’s time to nationalize Citigroup and Bank of America:

Citigroup, at $3.50 a share, simply doesn’t have the time to implement its new plan to get smaller slowly. And Bank of America, at $7.75 a share, doesn’t have the capital needed to absorb Merrill Lynch. Both are now trading at option value: on the hope, essentially, that somehow equity holders won’t be wiped out entirely. But they should indeed be wiped out, as part of a nationalization, along with preferred shareholders, including the government. TARP will show an immediate loss on its investments, which will serve as a salutary reminder for whoever’s in charge of disbursing the second tranche.

Nationalization is a messy solution, and one which will make no one happy. But it’s better than desperately trying to kick the ball down the field until the banks come back in a few weeks for even more money. If we’ve learned anything from the last Citi bailout, it’s that small interventions don’t work. What’s needed now is a complete revamp of both banks’ capital structures, and a brand-new owner.

“Nationalization,” of course, is a dirty word in the United States. We’re a very immature country, after all. There’s an international organization of center-left parties called the Socialist International to which Tony Blair and other mainstream left-of-center politicians from outside North America belong. Carol Browner participated in some Socialist International activities related to climate change. And that’s a good idea—climate change is an important issue that integrally requires international cooperation. This sort of thing is one of the reasons why international federations of political parties exist. But The Washington Times and Jim Inhofe tried to make a scandal out of it earlier this week. Because “socialism” is a dirty word. Like “nationalization.” But it’s the right thing to do, and that’s been clear for a while now. We can ill-afford to leave the health of the whole financial sector hostage to an ideological distaste for the concept. It’s not like we’re running a laissez faire banking system whose virginal splendor would be degraded via a forceful and effective state intervention, rather than a half-baked an ineffectual one.