…by Meg White
The place Meg puts the stuff she wrote
The irrational rationale against nationalizing banks
Categories: Economy

by Meg White

There are a lot of convincing economists out there calling for nationalizing the U.S. banking industry. Aside from my favorite economist, there’s this other Nobel prize-winning economist, this economics journalist, this former economist for J.P. Morgan and dozens more. And what about this professor of economics or these other two?

To be clear, virtually no one is suggesting nationalization as a permanent solution. The government-run banks would eventually be sold off and privatized after being deemed stable enough to attract a fair price.

I realize this isn’t a scientific study. And I’m not an economist. But there’s something to this sea change.

On ABC’s This Week over the weekend, fiscal conservatives Sen. Lindsey Graham (R-SC) and Rep. Peter King (R-NY) said we should consider nationalization. Perhaps the most shocking convert so far is former Fed Chair Alan Greenspan. The man Financial Times calls the ‘high priest of laisser-faire capitalism’ said he now supports nationalizing banks. The question now is who still opposes temporary nationalization of failed banks?

President Barack Obama and his economic advisors have recently brushed aside these widespread calls for bank nationalization. But, keep in mind that the stock market totally tanks any time it looks like nationalization is even on the table, so it’s unlikely any plan that even resembles nationalization will be announced in advance by the White House. And you can bet that announcement is going to come at 4:45 p.m. on a Friday, if it comes at all. Besides that, the administration’s talk about creating a “bad bank” sounds a lot like the arguments made by those who support bank nationalization.

Though economists — and increasingly politicians — are looking at bank nationalization as a possible solution, there are still battles being waged against the idea. First, let’s look at the semi-rational agruments:

  • It’s too expensive and difficult an operation for the government to take on. As for the expense, the government would be making a huge investment at the outset, but it would have a much higher rate of return than on, say, the TARP. And the banks, once nationalized, wouldn’t keep coming back for money every fiscal quarter. As for difficulty, I know how hard it is to have faith in the U.S. government, especially after the last eight years, but what has become clear is that bankers aren’t doing a good enough job. So let’s give someone else — anyone else — a shot.
  • Nationalization scares off private capital. The government doesn’t have the money or manpower necessary to nationalize all the country’s banks. So the question becomes what happens to those that aren’t taken over? This argument contends that no one would want to invest in the banks that don’t get bought out by the government, preventing a recapitalization of somewhat healthy banks. However, investors are already avoiding the banking sector.
  • Professor, writer and consultant Peter Cohan echoes the popular argument that it’s not fair to stockholders to nationalize the banks. It’s true; they would get the short end of the stick in this deal. But then Cohan suggests that instead of nationalization, we should create new banks to take over the business of the old ones. This way, the so-called “zombie banks” could die out, which Cohan admits would screw over those same shareholders he was so worried about earlier. The truth of the matter is that taxpayers and stockholders cannot both be equally satisfied with the solution to this crisis. However, investors take a risk when entering the market and taxpayers shouldn’t have to worry about taking those same risks every April 15. Thankfully, most bank shareholders are taxpayers too. Hopefully they’ll understand.
  • Then there’s Lyndon Larouche, who says that even nationalization is a bailout. The eccentric U.S. economist proposed forcing bankruptcy on the banks and creating a stripped down system where banks continue to exist on a small scale and the government offers federal credit to those who need it. At least I think that’s what he was saying. I spent a good half hour trying to figure out who gains and who loses in his “Hamiltonian national banking” system, but my brain began to hurt, so I moved on.

To me, these arguments are far from convincing. They appear sound at first, but tend to break down upon further scrutiny. But for politicians, there are two even less rational arguments that nonetheless wipe away any possibility of a sensible solution to the banking problem:

  • The first problem applies mostly to Republicans and neo-Joe McCarthys. Nationalization sounds like Sweden. And socialism. While this argument is more effective on Republicans, you can bet Obama doesn’t want to hear his opponents talking about how he’s “spreading the wealth around” like a commie. And I think we can all agree that any executive action that would bring Joe the Plumber back into the spotlight would be bad for our nation’s stability.
  • The second argument may surprise you. Seems that a majority of Americans agree with Larouche, at least on one point. Bailout fatigue has reached such a fever pitch that three-fourths of the country doesn’t want any money to go to “fat cat bankers,” even if the government gets assets out of the deal. Thus, though only months ago Americans were evenly divided over government involvement in private banking, 75 percent now oppose bank nationalization. So, regardless of whether the American public uses logic to come to its collective decision or not, opinion polls with such striking numbers generally hold sway with politicians, especially those facing reelection soon.

The reality is, the government is going to pour taxpayer dollars into banks no matter what. So we can either get something for our outsized investment or we can keep handing over our something for bank shareholders’ nothing.


For readers who want to do their own research, this Q&A about bank nationalization on The Wall Street Journal is a good place to start. Also, check out The New York Times’ Room for Debate segment on this topic.

Originally published at BuzzFlash.com.

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