Friday, February 27, 2009

Should The US Consider Nationalizing Banks That Are In Trouble

Professor Nouriel Roubini of Global EconoMonitor, who is also known as Dr. Doom (because he for years was warning of the on-coming financial crisis) has given several interviews over the lasy week to Business New Europe, Charlie Rose, Wall Street Journal, Bloomberg, Reuters, ABC, NBR and CNBC.

In his CNBC interview, he strongly advocates a Swedish-style bank nationalization to repair the ailing financial system and prevent banks from turning into 'zombie banks' like were in Japan.

"If you don't nationalize them on a temporary basis the fiscal commitments will be bigger. The alternative is actually a dangerous debt spiral.”
The Swedish-style bank nationalization is where the government of Sweden in 1992 had to deal with the collapse of a real estate bubble and had to take control of two of that country's largest banks, Nordbanken and Gota. The government stripped the banks of their bad assets, which it kept in a pair of new companies known as "bad banks." The remnant "good banks" were then merged into a single company and launched back into the marketplace.

Even Conservatives like Alan Greenspan and Senator Graham have publicly suggested that the idea of nationalization may be needed. Professor Roubini has pointed to this in a number of interviews like the one he had with Tunku Varadarajan in Wall Street Journal.

The biggest barrier to nationalization is the negative public image as 'Bolshevik' rather than 'pragmatic.' But this is stupid, and the result of idiots like Hannerty, Limbaugh, and Republican politicians who toss out accusations of socialism and communism without consideration. Nationalizing troubled banks would allow the government to take distressed assets without having to set a price.

For those who are scared of the word 'nationalization' you should consider the example of IndyMac, a bank that was nationalized and quickly re-privatized in less than a year. IndyMac was an example of a company that needed to be seized.

During a discussion of the banking crisis on ABC's This Week with George Stephonopilis that featured Professor Roubini, Professor Paul Krugman and George Will, and they discussed a temporary nationalization. Professor Krugman suggested calling nationalization “pre-privatization” to sugarcoat the program. Krugman also points out that in 2009 we have already nationalized 14 banks. Similarily the Federal government took control of mortgage finance companies Fannie Mae and Freddie Mac in early September of 2008.

Administration officials say they are determined to maintain the appearance, and in important respects the reality, that banks remain under private ownership. I do not agree with this, the current leadership of these banks are the major problem. The Obama administration argues that they have a responsibility to pursue the least costly solution, and that they continue to believe smaller steps than nationalization can resolve the crisis. They are wrong.

Another argument against nationilzation is that the U.S. Banking system is larger than Swedens, and while the problem is spread across many of the nation's 8,300 banks, the bulk of the problem is in a concentrated few. Fix these mega banks like Citi and Bank of America and you have taken the largest concentration of troubled assets. Nationalize these mega banks, and break them up, no bank should ever be 'too big to fail.'

No one is arguing that the banks should be nationalized on a permanent basis. Those who are arguing against that are attacking straw men.

Obama and his economic team need to step-up as leaders and whether they call it Nationalization or not (it will most probably be called receivership or conservatorship) and take over those major banks that have dragged the economy down.

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