Back to the Future

Joe Nocera has a column whose headline is “First Bailout Formula Had It Right.” The early grafs certainly tend to support that headline and feature Nocera talking about how key it is to get “toxic assets” “off the books” of our banks. But as we read deeper, it seems to me that he’s not talking about a return to the initial TARP plan at all, he’s talking about selective nationalizations.

To recall the difference, in either case the government acquires toxic assets from banks, thus restoring the banks to health. And then the government manages the assets and sells them off for something greater than $0 but almost certainly not enough for the taxpayers to avoid a large loss. This then restores the financial system to health, and prevents us all from losing even more than that through endless economic suffering. But in the TARP I scheme, the “toxic assets” come “off the books” of privately-held banks because the government just agrees to overpay for the assets. This leaves the shareholders owning a good bank and the government owning a bad bank. The government then gets to sell off the bad bank’s assets eventually. In a nationalization scheme, the government takes ownership of the entire bank and then splits it into a “good” bank and a “bad” bank. The good bank is then re-privatized (getting the taxpayers some money) and the government then gets to sell off the bad bank’s assets eventually.

In terms of the broader economic logic—the diagnosis of what’s wrong with the economy and what’s needed to fix it—these are similar ideas. But in terms of the implications for the owners of equity in financial service firms, the implications are very different. And in terms of the implications for middle class taxpayers, the implications are very different. The joke part of it is that the “capitalist” way involves huge government subsidies to rich people, whereas the “socialist” way involves people who made bad business decisions suffering losses.