The Grain

Via Felix Salmon, Joe Nocera rejects nationalization of irredeemably troubled banks because it “cuts against the American grain — and leaves shareholders with nothing.”

Like Salmon, I don’t find that convincing at all. It arguably does cut against the American grain, but that’s not reason to reject the option. Leaving the shareholders with nothing is more like a feature than a bug. The shareholders don’t deserve anything. And, indeed, one problem with giving aid to distressed banks without nationalization is precisely that it leaves the shareholders in control. With their equity nearly worthless, this creates perverse incentives about what to do going forward.

Also see Steve Waldman on the general subject of nationalization and the Swedish response to the early nineties banking crisis.

UPDATE: Recall that when cooking, oftentimes cutting against the grain is the right thing to do. Think of banking panics as the economic equivalent of flank steak.