Geithner and Summers Against Nationalization

Obama administration seems determined to stay away from nationalizing banks:

Explicit nationalization of financial companies has little support among key Obama officials, sources said. Treasury Secretary Timothy F. Geithner and top White House economic adviser Lawrence Summers think governments make poor bank managers and cannot efficiently manage a vast number of institutions, according to some of their associates.

When you’re talking about something like bank nationalization, you need to set the context correctly. Nobody thinks nationalizing banks is a great idea. There’s a reason that back in, say, 2005 absolutely nobody thought we should nationalize banks. After all, governments make poor bank managers. But when you’re talking about a problem of widespread bank insolvency that’s produced a global depression, then it doesn’t make a ton of sense to be worried about impairing the quality of bank management. Meanwhile, nothing would be stopping Secretary Geithner from keeping the same management team in charge of any banks he were to nationalize. The issue with nationalization has less to do with management than it does with ownership. There’s a consensus developing, that I can’t really evaluate, that we can’t have an economic recovery absent a $1 trillion gift to banks that made poor business decisions.

There are two ways we could make that kind of gift. One would be to just give them the gift, but to describe what we’re doing in a misleading way so as to try to minimize public outcry. Talk about the need to “get toxic assets of the balance sheet” will be prominent here. Another would be to seize control of the worthless, insolvent banks and then make the gift to what are now publicly-owned enterprises. Either approach would be costly, would be the kind of thing you’d normally avoid doing, and would run the risk that the government couldn’t adequately supervise the situation. But the former approach would preserve lots of free money for existing bank shareholders and cost the public extra. If Summers & Geithner have some completely different approach that they think will work, I think that would be an excellent idea. But nationalization, while not something I’m thrilled about, would be better than just forking money for no reason.