Nationalization and Bailouts

I was having a diffuse Twitter disagreement about TARP earlier that I think is worth blogging on.

A key point here is to pay attention to the fuzzy distinction between “bailouts” which are evil and “nationalization” which is seen by many as a wholesome populist alternative. This is, I think, an analytical error. TARP was a step on the road to nationalization, and if you think there should have been more nationalization then what you think is that there should have been more TARP, not less. After all, what was TARP? TARP was a program of “capital injection” into banks at a time when bank stock prices were depressed. The government took equity positions in large American banks. That helped give the banks enough money to continue paying their debts. “Nationalizing” of banks would have meant injecting even more capital into the banks so that they’d be wholly owned by the government, and then having the government fully assume responsibility for the banks’ debts.

This nationalization is basically what Ireland did. Except in the case of Ireland people have taken to calling nationalization a “bailout.”

And I don’t object to that terminology. What Ireland did was nationalize banks (thus wiping out their owners) and then bail out the banks’ creditors. This has ended up bankrupting the Irish state and looks like a giant mistake, but this is what a nationalization scenario in the United States would have looked like — a wipeout of bank owners and a bailout of bank creditors. The US is in a different situation from Ireland, so I think it’s very plausible that a policy which has failed in Ireland would have worked out well in the United States. And it would have provided an opportunity to restructure the banking industry in a number of beneficial ways. So if you want to say nationalization would have been a better idea than TARP, then I’ll applaud you. But keep in mind that nationalization would have been TARP on steroids not an alternative to “bailouts.”