I am reading an interesting article from Radical Perspectives on the Crisis. Nouriel Roubini, the celebrity NYU professor of economics, who is best known as “Doctor Doom” argues that nationalizing our failing banks temporarily is a more “market friendly solution”.
When I and others put it in the context of the Swedish approach [of the 1990s] — i.e. you take banks over, you clean them up, and you sell them in rapid order to the private sector — it’s clear that it’s temporary. No one’s in favor of a permanent government takeover of the financial system.
The Swedish banking crisis response, according to a post by Anders Åslund, can be applied to our current financial crisis. In other words, the Obama administration should use the swedish approach to write off those bad debts from normal banks and transfer them to bad banks (private equity fund) that it controls. Transferring bad debts to bad banks in order to avoid contaminating good loans in cleansed banks just as selling off those assets over several years in order to avoid trading undervalued assets. As a temporary form of nationalization, the Swedish approach seems like a better alternative than the corporate bailouts under TARP (Troubled Assets Relief Program).
The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks.
Unlike the corporate bailouts, temporary nationalization seems less than a simple redistribution- taking taxpayers’ money to fill the deep pocket of corporations. Temporary nationalization ultimately minimizes costs to taxpayers, according to Thomas Ferguson, a contributing editor of The Nation. Temporary nationalization gives taxpayers temporary ownership until banks become healthy again and the public’s shareholdings can be sold back to private investors at a profit.
Between guarantees, liquidity support, and capitalization, the government has provided between $7 trillion to $9 trillion of help to the financial system. De facto, the government is already controlling a good chunk of the banking system. The question is: Do you want to move to the de jure step.
The Obama administration may have avoided using the word nationalization because of its negative connotation (a political risk) given that we are capitalist society, but I am not sure that the new administration has embraced bailouts over temporary nationalization for ideological reasons. As more people like Alan Greenspan and Republican senator Lindsey Graham (two advocates of financial deregulation) show support for temporary nationalization, the Obama administration is more likely to nationalize banks (temporarily) in the next few months according to Roubini. Another good reason for nationalizing banks temporarily
we started with banks that were too big to fail, but what has happened, in the process, is that these banks have become even-bigger-to-fail. (…) You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing.
Take AIG for instance, one of the world largest insurance corporations is about to receive $30 billion, which will be the fourth government rescue since September. AIG alone has already received $150 billion in government loans, yet it’s socialism when the government tries to help Main Street. How did we get into this mess?
(…) the last decade was one of self-regulation. But in the financial markets, without proper institutional rules, there’s the law of the jungle — because there’s greed! There’s nothing wrong with greed, per se. It’s not that people are more greedy now than they were 20 years ago. But greed has to be tempered, first, by fear of losses. So if you bail people out, there’s less fear. And second, by prudential regulation and supervision to avoid certain excesses.”
Where is the “Invisible hand” when we need it? But wait! The “invisible hand” is why we are this mess in the first place.
