Grandstanding and the Case for Nationalization


Bailed out bankers are now whining about political interference in the operation of their businesses. Kevin Drum rightly suggests that this is relevant to the debate over whether or not the government should formally take control over the most-distressed large institutions:

Some things just make sense: if you’re accepting bailout money because your capital has become dangerously low, then it’s hardly unreasonable to demand that you stop depleting capital even more by continuing to pay out full dividends. That’s directly related to the problem at hand and it’s a reasonable regulatory response to a serious problem.

On the other end of the spectrum, though, you get populist grandstanding like the recent fuss over Northern Trust hosting a bunch of client parties at a golf tournament they were sponsoring in Los Angeles. Aside from the fact that money for the events all came out of the bank’s marketing budget — which no one in their right mind thinks should be shut down during a recession — they almost certainly would have wasted more money by calling off their parties than by holding them. Those kinds of things are scheduled far in advance, and the contracts they signed probably didn’t allow them to recover more than a pittance if they cancelled at the last minute. So if they had cancelled, they would have ended up paying out 90% of their budget and getting nothing for it, instead of paying out 100% and getting something in return.

Now, you can argue that they should have cancelled anyway purely for the PR value. And maybe so. And it’s obviously a judgment call about what kinds of rules should apply to bailed out banks that ought to be conserving cash. Still, those of us who tentatively favor nationalization should also favor a process that keeps Congress at arm’s length. The whole point of nationalization is to restore both solvency and confidence, and let’s face it: sober management isn’t really Congress’s stock in trade. I’m not quite sure where the balance lies, but it’s worth an open discussion.

I think that’s precisely right. But I also think it’s part of the case for nationalization. You guarantee the debts of the above-water banks (which should work out okay since the banks are above-water) and assume responsibility for the debts of the under-water institutions. But in exchange for doing this—which will cost a ton of money—the government assumes ownership and control over the under-water institutions. It then appoints a new board (which appoints a new CEO and some other executives) and directs them to sell off its assets and properties over time all the while making management decisions driven by a desire to maximize profits. The point here is that since the public owns the bank, the profits belong to the public. So the publicly-owned bank has a mandate to serve the public interest—by maximizing profits. And this then becomes not only a relationship that’s formally at arms-length from congress but an actual reason for congress to avoid screwing around with the bank. The bank is being managed to make money—for you! To recoup the losses you incurred when the bad debts were paid off.

The current situation, while minimizing formal public control, actually maximizes the level of BS grandstanding. You have you public funds flowing to private institutions. We’re told that this is necessary to serve the public interest. But that means that each and every decision taken becomes open to scrutiny from a public interest point of view. Does the golf tournament really serve the purpose of getting credit to flow? How come you took a taxi to the airport instead of a bus? It never ends. If the publicly supported institutions are also publicly owned, then you have a rationale for minimizing this kind of nickle-and-dime political posturing.