Matthew Yglesias » Nationalization, The Hows and Whys

Sep 27th, 2008 at 9:04 am

Nationalization, The Hows and Whys

Yesterday, I said that rather than a bailout of banks we needed to nationalize them. But I illustrated it with a picture of Lenin and a lot of overheated rhetoric. But it’s a serious argument. The very serious and moderate Brad DeLong explains how it would work.

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24

24 Responses to “Nationalization, The Hows and Whys”

El Cid Says:
September 27th, 2008 at 9:22 am
From Nouriel Roubini, via Calculated Risk:

The Treasury plan (even in its current version agreed with Congress) is very poorly conceived and does not contain many of the key elements of a sound and efficient and fair rescue plan. … It is a disgrace that no professional economist was consulted by Congress or invited to present his/her views at the Congressional hearings on the Treasury rescue plan.

There’s a reason no real economists were brought in, particularly not the ones (a) outside the administration & Fed sphere and (b) who weren’t 100% wrong for the last 5 years.

They don’t want economists getting in the way of an enormous mass give-away of hundreds of billions, even trillions of dollars, to the super-rich.

An inefficient give-away of massive amounts of taxpayer dollars to the Wall Street super-rich is a feature, not a bug.

Sure, they hope it will have a healing effect on the economy for some time period, but, hell, they don’t get opportunities to instantly (comparatively) and directly give hundreds of billions or trillions of dollars to the super-rich all that often.

No matter what happens, they’re not going to let this chance slide by.
El Cid Says:
September 27th, 2008 at 9:38 am
Apologies. Link to Roubini excerpt.
Addams Says:
September 27th, 2008 at 9:59 am
I don’t get it. The Paulson plan is to buy up a lot of financial assets of iffy value through a reverse auction. It’s chancy because the ultimate value of these assets is a great unknown. Maybe the taxpayers make out in the end; maybe they lose.

The DeLong plan is to buy up whole financial institutions, specifically institutions that are in trouble. And yet the financial services sector is is, many would agree, bloated. It is in a precess of contraction due to oversupply. Thus these services and the firms that supply them are declining in value as well.

So why is the second plan a better investment of taxpayers’ money than then the first?
Jasper Says:
September 27th, 2008 at 10:35 am
Yes, yes, yes to nationalization. But we can’t be so stupid as to use such a term. Right-thinking, God-fearing patriotic Americans know socialism is evil! Better to call it “restructuring” or “recapitalization.”
roger Says:
September 27th, 2008 at 10:38 am
Better industry to nationalize would be health insurance. It would actually be a step towards saving trillions of dollars in health care costs, too.
Jasper Says:
September 27th, 2008 at 10:45 am
Addams: the heart of the problem we’re dealing with, a contraction of the banking sector, is precisely the opposite of what you describe. I have no doubt a degree of consolidation is unavoidable, but what DeLong is quite rightly advocating is (b)adding(/b) capitol to the banking system.
JT Says:
September 27th, 2008 at 10:57 am
Matt,

The Swedes did indeed nationalize their banks in 92. And then they sold most of it off when sanity returned to the market at a net cost to the taxpayer of between 2% and 0. This later point needs to be highlighted, nae, shouted from the roof tops, to get the support of those of us who really don’t believe in gov. ownership of the means of production but who also don’t want to see those who engaged in ‘moral hazard’ behavior rewarded for that greed. Think of temporary gov ownership as the ultimate ‘market correction’

JT
flo Says:
September 27th, 2008 at 11:22 am
Don’t see how this benefits the taxpayers, when it nationalizes only the troubled institutions, something we already do. If you want to nationalize, take over some profitable banks as well. Or maybe I missed something in my sleepiness.
rapier Says:
September 27th, 2008 at 11:41 am
At least five trillion in credit will go bye bye, forever. Won’t be paid off. Somebody, a lot of somebodies, are going to lose. The bailout scheme is designed to limit the losses by the FOH, Friends of Hank and pass them along to the taxpayers. The hope is that the FOH can then do their vulture thing and pick off the best of the commercial banking system and other corporate assets throughout the financial sphere and really the entire economy.

They will make sure the taxpayers lose out to the max. Let me assure you as we speak the pigmen are hatching their plans for the future as everyone tries to fix the unfixable past. The great creative minds which brought you the serial bubbles of the last generation are hoping to finalize the biggest asset transfer in history.

All abetted by the stupid Democratic leadership, and the astoundingly misguided Barney Frank. This is going to be a disaster of monumental proportion for the Democrats going forward. The economy is going to tank anyway. There will be further huge downdrafts in all capital markets. Some for good cause and some so that the FOH can pick off the good stuff.

It should be noted that the FOH will often just be acting as agents for foreign dollars buying up American assets.
Addams Says:
September 27th, 2008 at 12:01 pm
Jasper: Capital is going to be added either way, under either the Paulson plan or the DeLong plan. Taxpayers are going to step in to purchase troubled assets. The question is what purchase is the best investment for the taxpayers’ funds. Would it be better to buy some of those iffy securities owned by financial institutions? Or would it be better to buy iffy financial institutions themselves? Either way, it seems to me, there is upside and downside risk involved.

If there is a need for consolidation in the banking sector, due to an oversupply of banking services, then I’m not sure how the taxpayers are served by buying the worst and most troubled banks? Won’t the government end up liquidating many of these institutions at a loss?
kafka Says:
September 27th, 2008 at 12:11 pm
“All abetted by the stupid Democratic leadership, and the astoundingly misguided Barney Frank. This is going to be a disaster of monumental proportion for the Democrats going forward. The economy is going to tank anyway….”

Agree, except Wall Street poodles like Frank aren’t stupid. They just know which side their bread is buttered on.
JRVJ Says:
September 27th, 2008 at 1:07 pm
IMO, you guys (and Matt Yglesias of late), seem to be confusing your preferences with reality.

Dems are going along with the Paulson plan (with a bunch of changes), because there is no way they will jeopardize Obama’s chance of becoming President after 8 years of Bush.

Yes, it sucks, but that’s life (and that’s exactly the same argument I would give PUMAs).

Now if the crisis had happened AFTER the elections, with the democrats ascendant and having cleaned the Reps clock, then things would be very different.

Having said all the above, if things aren’t working well and/or if not much money has been used from the Paulson fund, the Dems can try to ram something else through.
Jasper Says:
September 27th, 2008 at 1:13 pm
If there is a need for consolidation in the banking sector, due to an oversupply of banking services, then I’m not sure how the taxpayers are served by buying the worst and most troubled banks?

Well, I don’t think that what DeLong is describing means that a taxpayer purchase of equity in a given bank necessarily means said bank will survive, or be permitted to survive independently, indefinitely. And in general, the taxpayers are “served” because enough bank failures coming at a sufficiently rapid pace will undermine the general economy and exacerbate any recession. Preventing this helps people — including those who pay taxes. Also, there is some merit, too, in not becoming overzealous in our efforts to shut down or merge insolvent banks. I agree they all can’t be saved. The key is balance: you want to shut down hopeless cases, but on the other hand an unnecessarily drastic reduction in the number of banks both fights against the greater goal (preventing a massive contraction in the banking sector) and will tend to raise the cost of banking in the long run (by reducing competition). I’m not saying bank consolidation could or should be avoided at all costs, I’m just arguing for caution.

Would it be better to buy some of those iffy securities owned by financial institutions? Or would it be better to buy iffy financial institutions themselves? Either way, it seems to me, there is upside and downside risk involved.

Well, the outlines of the plan including the latest compromises encompass both equity purchases and purchases of troubled assets, if I understand correctly. I think the former approach is infinitely superior, however. Buying troubled assets from financial institutions (FIs), to the extent that we pay more for them than the market currently values them, is the same as giving them money no strings attached. FIs under such a scenario have no incentives to moderate their claims on taxpayer money, but instead they have huge incentives to hoover up every penny of taxpayer money they possibly can. I mean, if somebody were offering you a portion of $700 billion, wouldn’t you try to get as much as this sum as possible?F Frankly, FI CEOs would be derelict in their duties to shareholders if they didn’t do everything in their power to maximize the size of the cash gift they receive from taxpayers.

Making them fork over equity, on the other hand, provides a powerful disincentive against such behavior. Attaching a price to something tends to mean less of it is consumed. If we want less and not more taxpayer money consumed in the bailout, we’d best put a price (equity) on said money.
FS Says:
September 27th, 2008 at 9:29 pm
Rather than Karl Marx, you could have used Joseph (of Biblical fame) for his success in nationalizing the land of Egypt of behalf of Pharoah by taking advantage of a period of crop failures.
J Thomas Says:
September 28th, 2008 at 8:43 am
Having said all the above, if things aren’t working well and/or if not much money has been used from the Paulson fund, the Dems can try to ram something else through.

Paulson would have four months to spend three quarter of a trillion dollars.

What’s the chance there would be some left over?
michael Says:
September 28th, 2008 at 9:35 am
Please. DeLong was a huge supporter of Alan Greenspan until yesterday. (Read his LATimes review of Greenspan’s book.) He not only missed everything, he got it backwards!
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Nationalization, The Hows and Whys

24 Responses to “Nationalization, The Hows and Whys”

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