AIG and the Case for Bank Nationalization

Tyler Cowen says of the AIG bailout outrage “The real lesson is that this is another reason not to nationalize banks. It means politicizing every decision which ends up in the newspaper.”

I don’t really see the logic there. If Citi and Bank of America are recipients of tens of billions of dollars in government funds, and are staying in business only because of explicit and implicit government guarantees, then all of their decisions are politicized anyway. Avoiding the politicization of business decisions does seem like a good reason to avoid government bank bailouts altogether and just let large firms go bankrupt. But most knowledgeable people—including Tyler Cowen, to the best of my knowledge—think that there are even better reasons to not do that, namely that doing so would make the global economic collapse much more severe. A scenario under which privately owned zombie banks and the U.S. congress spend years in a mutual embrace is the one most likely to lead to large-scale politicization of business decisions. If you rip the band-aid quickly, you should be able to nationalize a firm, split it into “good” and “bad” banks, sell the “good” bank to private owners, and then be left with a publicly owned “bad” bank that can credibly argue that it’s managing assets on behalf of the taxpayers and deserves to be left alone.

Is that a great idea? No it’s not. It’s with good reason that we normally prefer our business enterprises to be neither owned by the state nor dependent on state subsidy to continue existing. But given that we’re choosing between those two options, I don’t see much to like about the dependent on state subsidy path.

For more, definitely read Kevin Drum’s bank nationalization primer.