Bank Nationalization
I think Felix Salmon and Tim Fernholz are both unduly impressed by the arguments presented in Ryan Lizza’s Larry Summers profile as to why the administration was right to reject bank nationalization as a financial crisis-management effort. Here’s what Lizza reconstructs:
The memo was divided into four sections. First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As [Obama economic official Gene] Sperling often argued, “You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”)
Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden, which was regularly cited by economists who favored nationalization. But Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe—interest rates had reached a hundred per cent—that there were no other options. In addition, Nordbanken, the largest bank nationalized in Sweden, was already eighty per cent government-owned. Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.
The results of the stress tests showed that the banks were not in as dire shape as commonly believed. Most of the nineteen banks were able raise money privately. “It worked,” the Treasury official said. “People had money to put into banks. The nationalization crowd would have had the government putting all that money in.”
The key thing here is that the arguments as being relayed to Lizza seem not to know that the proposal to apply the Swedish model to the banking sector was a proposal to nationalize insolvent banks and explicitly guarantee the debts of the solvent ones. This is precisely designed to deal with the “nationalization sets off larger panic” worry. The fact that the stress tests showed that many banks were not in such bad shape is also irrelevant. Nobody ever proposed that we nationalize banks that weren’t in trouble. The proposal was to guarantee the obligations of banks that weren’t in trouble, a low-cost move since these are the banks that aren’t in trouble. The Obama administration wound up implicitly doing that anyway, which is precisely why most of the banks were able to raise money privately. The exact same thing would have played out with the exact same banks if the troubled banks had been nationalized.
The last resort argument seems frivolous to me. Yes, Sweden did this as a last resort. And it worked. Which is why it was being suggested that we not wait through a grinding two-and-half-year financial crisis before employing the remedy. I don’t think Summers took from the 1929-1940 experience that the correct thing to do is wait through 11 years of Depression before stimulating aggregate demand.
The legal authority question, by contrast, is obviously a real concern. If there’s no legal way to do something, then you can’t do it. But by the same token, if lack of explicit legal authority was really the objection to the policy, then you’d be writing a memo about (a) options to get the authority, (b) options to do it without explicit authority, and (c) alternatives to nationalization. Instead, we got a memo in which lack of explicit legal authority was thrown in as part of the kitchen sink.
To me the whole thing looks political. If you’re going to do something that’ll get you tagged as having undertaken an unpopular “bank bailout” then you might as well do it in a way that makes the bankers happy. Nationalization sounds at first glance like a sunny populist solution, but it would have still been hugely expensive and still characterized by many as a “bailout” (and, indeed, the whole point is in fact to bail out the creditors of major financial institutions) and also gotten Obama tagged as a Communist. You can’t take the politics out of politics, so on one level I say so be it. But on another level you still do have to worry if the handling of this crisis has paved the foundation for the next crisis.
28 Responses to “Bank Nationalization”
Register
RSSLogin
Yglesias Tweets
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
October 5th, 2009 at 4:37 pm
Two crucial reforms that are necessary are having all banks (including I-banks) capitalized sufficiently to cover a good portion of derivative-based obligations they have. And to do this, it’s crucial for banks to know what they’ve got on their books.
Neither of these will happen and this will happen again.
Anyway, forget about that. What’s up with Jon and Kate?
October 5th, 2009 at 4:40 pm
But if Obama had nationalized the big banks, all those toxic assets would have ended up in the Treasury, at a great and obvious cost for taxpayers and banksters. Instead, they ended up in the Fed, at a great but hidden cost for taxpayers, and that allowed another round of giant bonuses for the banksters.
October 5th, 2009 at 4:43 pm
Now listen here, dad!
All you do is yap-yap and say “Bad, bad, bad, bad.”
Well, I have my rights, sir, and I’m telling you
I intend to go on doing just what I do!
And for your information, you Lorax, I’m figgering
on biggering
and biggering
and biggering and biggering.
October 5th, 2009 at 4:45 pm
“you still do have to worry if the handling of this crisis has paved the foundation for the next crisis.”
I’m not worried. It’s a certainty.
Bottled water, canned goods, ammo.
Thin glass bottles, gasoline, dishwashing soap.
October 5th, 2009 at 4:48 pm
What is really hilarious is the certainty about timing.
The headline troughs will be in the odd years, 2011 and 2013.
October 5th, 2009 at 4:50 pm
Matt:
But on another level you still do have to worry if the handling of this crisis has paved the foundation for the next crisis.
Good point. I was pro-Swedish model b/c I believe things were worse than they turned out to be, with good reason.
The Swedish model would have been more cost effective, if it didn’t cause a panic, and we can’t know whether not there would have been one. You can’t blame Obama for being cautious. But even that caution was risky.
If they don’t get decent financial regulations then this will all happen again and Summers’ advice will have been proven ill-advised.
October 5th, 2009 at 4:58 pm
See, this always looked to me like a political miscalculation. Giving tons of $ to banks in a way that makes bankers happy makes you look (not unreasonably) like you’re overly friendly with the banks. But if you’re taking over banks, putting Wall St. types in prison, and generally railing against the evil financiers, then as long as the situation ends up getting better you get a populist boost since no one likes bankers. Taken-over banks will get straightened out and re-sold to private investors, the new rules and prosecutions will put Wall St. in check for a while, and it’s all good. And sure the Glenn Beck teabagger crowd would call you a Communist for this, but they’re doing that anyway.
Of course all this is arguing about who’s responsible for opening the barn door, after all the horses escaped.
October 5th, 2009 at 5:03 pm
“The Swedish model would have been more cost effective, if it didn’t cause a panic, and we can’t know whether not there would have been one.”
There’s something else to be thought of here. If the Swedes had mishandled their situation, the worst downside would be that there might have been a bad recession in Sweden. There would have been no shortage of German, French, etc. banks clamoring to exploit the situation after a few years (after all, the native competition would either be gone or weakened). But all that is is a recession in Sweden.
The US majors collapse and you can easily envisage worldwide economic collapse.
October 5th, 2009 at 5:13 pm
Strikes me that there’s a clear legal authority to take over the Banksters. The FDIC does it every week, and has done so throughout the financial crisis. We took over AIG as well.
Summers was just looking for excuses to *not* have Uncle Sam move in to take over Zombie Banks.
Instead, he, Timmy and the Fed are reinflating the bubble.
John
October 5th, 2009 at 5:14 pm
It’s all navel-gazing at this point. The issue now is to focus on financial reforms. Lorax @ 1 gets it right. Define a bank as anything that borrows short and lends long (borrows liquid and lends illiquid) and impose capital requirements and leverage limitations. Legally regulate derivatives in a similar manner as non-synthetic securities. Reform the way credit rating agencies are allowed to be compensated for their work or set up an official public alternative to Moody’s et al.
A public hanging of some AIG folks might be helpful too, if only for catharsis.
October 5th, 2009 at 5:32 pm
Dude. Are they paying you to blog about American politics while you’re in Denmark? Go to Dyrehavsbakken or something.
October 5th, 2009 at 6:01 pm
I think MY is closer to the mark here; Ezra Klein is almost laughably obtuse in his sequence of posts.
If one does NOT believe that those who work on Wall Street are Masters of the Universe, and similarly does NOT believe that Larry Summers is always and everywhere the Smartest Guy in the Room, but DOES believe that the financial services industry in cooperation with a group of willing congressmen well and truly screwed the US economy, then one has a bit of a different framework for analyzing the choices that were made between September 2009 and June April 2009.
To me at least, the key to the entire effort as it shook out was that no Really Important Dude in the finance industry have any of his money be put at risk, and absolutely not face criminal investigation for anything he did from 2001-2008. All the rest falls after that, including the requirement that the beautiful perfectness of Wall Street as it existed in 2007 not be disturbed in any way.
Cranky
October 5th, 2009 at 9:21 pm
If there’s no legal way to do something, then you can’t do it.
Only if you’re a pussy.
October 6th, 2009 at 12:23 am
The fact that the stress tests showed that many banks were not in such bad shape is also irrelevant. Nobody ever proposed that we nationalize banks that weren’t in trouble.
I sense some revisionism in the works.
The two sides of the debate were:
(1) We should immediately nationalize several big banks; and
(2) We should give Geithner’s plan time to unfold before we opted for nationalization.
What Matt is doing is making use of the fact that the nationalize-now camp was never particularly clear on exactly which banks would be nationalized using what criteria–it was just considered a given that several big banks would be no-brainers. So now Matt is trying to suggest that waiting for Geither’s plan to determine which banks required nationalization was consistent with the nationalize-now view, when in fact whether or not to wait to see how Geither’s plan worked out was exactly what was being debated.
October 6th, 2009 at 12:28 am
By the way, Matt is also relying on a ridiculously over-simplistic division of banks into two categories, “in trouble” and “not in trouble”. Of course virtually all the banks were at least somewhat in trouble, but again the question at the time was whether several of the big banks were in so much trouble that Geithner’s plan would have no hope of working.
October 6th, 2009 at 3:01 am
Fat lying bastard.
October 6th, 2009 at 3:46 am
God Summers you douche bag.
The fact that the historic evidence points to nationalization as being the best option Summers is enough to prove him a complete clueless douche. His response that Nationalization is the answer when nothing else works is fucking stupid as hell. How the fuck is the solution that works when everything else doesn’t not better then those other “solutions”? Is it because bankers cant get rich? That would be terrible…
Its better that investors temporary flee away from shitty banks then flee to them because the government compensates all losses. Investors will flee back to banks once Nationalization fixes the fuck ups those very investors made.
The point of Nationalization never was about giving investors free money for their fuck ups; it was about actually restoring credit flows, and fixing the problems instead of having banks hoard money and hide their problems hoping for them to magically disappear.
The banks weren’t able to raise money privately; banks getting money from investors because the government compensates all losses and gives banks trillions of dollars isn’t the banks raising money; its the government giving them money.
Bank nationalization would of solved a variety of other problems we have. No big bonuses for CEO’s who destroyed the economy, no banking lobby to destroy credit card reform, the consumer protection agency, mortgage cram downs. No private banks evicting people out of homes, further decreasing home prices and causing homes to sit idle.
Summers =’s a dipshit douche.
This nation is fucked by its complete lack of intelligence.
October 6th, 2009 at 4:25 am
MY “The legal authority question, by contrast, is obviously a real concern. If there’s no legal way to do something, then you can’t do it.”
Agree. Even if there was a mild consensus within the administration at the time that nationalizing banks was the best option, the idea quickly lost traction when they began to delve into the legal ramifications of doing so. It would have been a huge mess. Legal and political.
Having watched since January about 30 hours of Bernanke testimony on the Hill, three themes seem to stand out.
One, the future Fed MUST have the legal authority to react quickly and step in at the first sign of trouble -and Nationalize broken banks. Go in, do what you gotta do, break em up, and sell what value remains off in pieces.
Two, Bernanke is a hardcore “too big to fail” is “too big to exist” banker. He pounds this theme home, especially when being questioned by Republicans. He has made clear over and over, if we don’t address the “too big to fail” dynamic soon, disaster looms on the near horizon.
Three, and this is a little cloudy, Bernanke seems to pushing for the Fed to become America’s national bank. The Fed is an incredibly complex organism, and already performs many central bank functions, but I think Bernanke sees the Fed as the only institution that can realistically perform watchdog duties on American banking, because of its independence and sheer size.
Also, I think Fanny and Freddie are being looked at to provide the function of the National Bank, rolled under the auspices of the Fed. It’s all pretty tricky, with the Fed being a quasi-independent institution, but Bernanke will discuss with Congressman and Senators pretty much anything, but not Fanny and Freddy.
Fanny and Freddie are being kept off to the side, while hopefully someone is cleaning them up. They were rock solid banks, at one point, performing yeoman’s duties for the little man before they stupidly got involved in sub-primes.
A lot of money has poured into them. Hopefully Fanny and Freddy emerge, one as the Peoples Bank of the United States and the other as America’s Green Bank. We desperately need both functions served, and Fanny and Freddy are the logical candidates.
October 6th, 2009 at 4:49 am
The legal authority question, by contrast, is obviously a real concern.
No, it’s not. Those banks got bankrupt, or were going to go bankrupt, and there is no problem in taking over a bankrupt company, be it a bank or Joe’s Diner.
October 6th, 2009 at 6:33 am
We have Goldman Sachs upgrading big bank stocks to “attractive”.
It seems that Summers has been vindicated.
October 6th, 2009 at 9:47 am
Agree with abb1 – send in a bunch of mean f*cking auditors, and toss their records. If they can survive a figurative body cavity search of their finances, then they both can’t be taken over, and probably don’t need to be. Otherwise, they go bankrupt, and the board of directors will sign the papers – or face the wrath of the rest of the financial community, when they default on their obligations.
October 6th, 2009 at 10:17 am
“No, it’s not. Those banks got bankrupt, or were going to go bankrupt, and there is no problem in taking over a bankrupt company, be it a bank or Joe’s Diner.”
Yes, it is. It’s not so much that it’s difficult for anybody with the cash to take over a bankrupt company – it’s that the government can’t spend cash unless it’s authorized by the Congress to do so. Without that authorization, spending (in this instance) large amounts of cash is technically theft from the government. That means that other interested parties can claim that the company wasn’t bankrupt (and, in some cases, it may be a matter of judgment not science that is was in fact bankrupt)and that the government stole their assets. Now, that’s probably going to be hyperbole, but you’ve thrown open the door to that hyperbole if you haven’t got a legal infrastructure behind you.
October 6th, 2009 at 10:45 am
[...] I really don’t want to redo the nationalization debates, but Felix Salmon, Tim Fernholz, and Matt Yglesias all have smart things to say you should check [...]
October 6th, 2009 at 12:01 pm
No, burrito, when he says that there’s “no legal authority to take over large bank-holding companies”, he is implying that this is something like expropriation. Well, it’s not; a company goes bankrupt and the government takes over – that’s the most natural thing in the world. Usually the government takes over to liquidate, but I don’t see any legal problem with nationalization. At that point the company is a corpse, whether you sell it for dog food or harvest the organs makes no difference.
October 6th, 2009 at 12:09 pm
Oh, sure, there has to be some sort of bill or decree or a court decision for nationalization, no question about that. But I don’t think it’s too difficult to do in an emergency situation.
Think about it: any cop can take your car, your personal private car, if he feels he needs it to chase a criminal or something. This is quite trivial, I’m sure.
October 6th, 2009 at 12:21 pm
It’s called talking their book. There’s other people who think the fourth quarter will be a smoking hole in the ground.
October 6th, 2009 at 8:00 pm
[...] than that. For more on the problems with Lizza’s profile, check out what Dean Baker and Matt Yglesias have to say. Paul Krugman has an interesting take as [...]
October 11th, 2009 at 1:12 pm
Concerning the Restructuring of the Global Financial/Economic System and Recent Discussion of Nationalizing “Banking” Interests
With regards to “nationalizing” Banks and other “investor owned” Institutions, we must be realistic concerning the inter-national composition of the investing institutions, corporations, and individuals.
Writing from a libertarian socialist point of view, I think it is necessary to clarify the objectives of any comprehensive program to re-dedicate private resources to a quasi-public mission and to consolidate equity and assets for the purposes of sharing the former and writing off the economically paralytic inflationary cost aspects of the latter.
In lieu of an economic system based on credit and equity trading, whose motivation is the underwriting of speculative ventures, we need to transform our fundamentally inflationary financial/economic system to one that is based on equity sharing and meeting the needs of people in the form of community betterment.
Such a financial system would be the right hand, the resource allocation facilitating function and services of an ambidextrous ecological, democratic, economic “plan and implement” economy that would respect and favor the sovereignty of villages/neighborhoods, educate-foster-facilitate-inculcate inter-community and inter-regional equality, unity and cooperation based on the basic principles of inclusion, equity, humanity, mutualism, altruism, quality of life (in lieu of standard of living), environmental/public health and wellness, sustainability, and peace.
Such a system would seek to establish a more just balance between competitive advantage and comparative advantage with the concerns of those indigenous to a community being paramount.
Such an economic system would recognize the necessity to embrace and implement conservation ethics for shorter term programs and projects of ecological economic redevelopment dedicated to survival pursuits and skills and its concomitant ubiquitous environmental improvement activities, and to the longer term programs and policies related to the legacy of the human race and its dominion (i.e. the recognition and respect of the resource limits imposed by a finite planet).
I call such a proposal an equity union and believe it to be a prudent and practical alternative to the extant economic/financial system. I believe such an economic rearrangement based on the fundamental mission of world unity and cooperation is the best hope for the purpose of entering an unprecedented era of peace and human progress and success.
Mike Morin
Eugene, OR, USA
wiserunion@earthlink.net
(541) 343-3808