Martin Wolf: Nationalize, Nationalize, Nationalize

The FT‘s Martin Wolf continue to make the case for bold action of cleaning up the banking sector, and makes the point that if the United States were dispensing advice to a supplicant nation, we’d be urging them off the kind of wishful thinking that seems to be governing a lot of policymaking:

Assume that the problem is insolvency and the modest market value of US commercial banks (about $400bn) derives from government support (see charts). Assume, too, that it is impossible to raise large amounts of private capital today. Then there has to be recapitalisation in one of the two ways indicated above. Both have disadvantages: government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds. But the choice is inescapable.

If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. Dominique Strauss-Kahn, IMF managing director, said the same thing, very gently, in Malaysia last Saturday.

The stimulus bill has attracted the bulk of the commentary because I think most people feel more competent to talk about those issues. But I think the banking system issue is ultimately more important and more fundamental.