AEI Scholar John Makin Calls for Bank Nationalization
This is mostly interesting because of the source’s institutional affiliation:
“I think they know how big it is, but they don’t want to say how big it is. It’s so big they can’t acknowledge it,” said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”
Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.
Yes, that AEI. It’s worth noting, as well, that Makin specifically lists the Japanese economy as one of his areas of specialty. One prominent line of argument I’ve heard against a “Swedish” solution to the financial crisis is the observation that the Swedish financial system was much smaller than the U.S. one, in virtue of the small size of the overall Swedish economy. I think this has some force. What worked in Sweden may not work in the United States. Japan, however, is much more a big economy like the United States. And what we have from there is a cautionary tale which shows that whether or not nationalization can be made to work in a big economy, half-measures definitely can’t.
38 Responses to “AEI Scholar John Makin Calls for Bank Nationalization”
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February 14th, 2009 at 8:52 am
Right now the problem is political and psychological — everyone knows there are big zombie banks; however, the Obama administration will need a lot of political cover to push nationalization as the cure.
February 14th, 2009 at 8:59 am
BOOMOTHAFUCKINHOO BITCHES!!! :
http://www.nytimes.com/2009/02/14/business/economy/14pay.html?_r=1&hp
February 14th, 2009 at 9:08 am
If, ya know, nationalizing the biggest five investment banks would mean an immediate write-off of say $50 trillion in worldwide fictitious capital, bringing down 10-30% of the global financial system, there might a reason for caution.
Or not. Bring the Jubilee.
February 14th, 2009 at 9:17 am
Bob,
It would not be that much as wiping out shareholders does not mean bondholders get zero.
jpm market cap is “only” 92B, Goldman in the 50s, BAC at 35.
In otherwords, we have already given out this much money.
Then, estimated losses on the real estate is much less than $50t, probably closer to 2-3T. I would have to look this up to be sure.
February 14th, 2009 at 9:17 am
This isn’t economics, or even politics. It’s theology. The worship of the “free” market, which is really the worship of large sums of money, and the worship of “U-S-A.”
Making this society accept its status quo isn’t the envy of the world is likely impossible. Like other countries, we will have to have rationality imposed from the outside, likely when the creditors call in their notes.
February 14th, 2009 at 9:24 am
It is easy.
Name the bill nationalizing the banks
The Patriotic Save And Defend America Act.
After all to pass their Enabling Act
the Dems just needed to call their bill the
American Recovery and Reinvestment Act.
God knows nobody read the thing before voting.
February 14th, 2009 at 9:29 am
4:I was thinking about the tangly weavedwebwelt of derivatives and SIV’s CDOs CDSs MBSs etc. Whatever.
FDIC Sellin Banks on EBay or sumpin like that, I may have misread. …Calculated Risk.
When the system goes bluescreenofdeath, you gotta hardboot. Bring the Jubilee.
February 14th, 2009 at 9:45 am
Matt, more importantly, assuming you are a Joss Whedon fan (i’d be fairly shocked if you are not), what did you think of Dollhouse?
February 14th, 2009 at 9:47 am
Well, also from the article, I at least like this guy’s attitude:
February 14th, 2009 at 9:57 am
OT Matt, but I’m surprised you haven’t commented on two of the bigger “winners” in the stimulus bill: Amtrak and light rail.
February 14th, 2009 at 10:00 am
One prominent line of argument I’ve heard against a “Swedish” solution to the financial crisis is the observation that the Swedish financial system was much smaller than the U.S. one, in virtue of the small size of the overall Swedish economy. I think this has some force.
I don’t. The Swedish financial system was smaller (employed fewer people, had more debtors and creditors involved), but, you know what? The Swedish government is a lot smaller than the US government as well. Doesn’t matter. (What I heard as the number of people involved in the US financial system was around 40k. Woo.)
If you mean there is a great deal more money involved, well yes. Excepting that in our current situation, the financial system has essentially become isolated from the economy (no lending, eh?), so the number of zeros involved doesn’t matter. The number of zeros involved only matters when it hits the real world and someone tries to spend it. Since the point of nationalization is to make that problem go away, it doesn’t matter.
[Really. Take your hand calculator (or the one on your computer) and multiply 1,000 * 1,000,000. Now you have 1,000,000,000. The only place that matters is on the output display. Divide by 10^27. Now it's a really small number with a bunch of leading zeros. Jimmy cracked corn, and I don't care. Now turn off your calculator and those zeros go away. The only real world impact was a fraction of your time, and tiny amount of energy.]
The only real world impact of nationalizing the banks should involve debt reduction and writedowns and an increase in the size of the national debt, which was going to happen anyways.
People are trying to make this harder than it actually is. The banks went bankrupt, but we prevented them from going under to save the depositors, and now we’re going to kill the busted banks without hurting everyone else. Just like an uber-capitalism bank collapse, without the pain.
max
['We stop trying to save the fortunes of idiots, another words.']
February 14th, 2009 at 10:03 am
Re ““I told the banks clearly, ‘I am in a position to supervise you,’ ” Mr. Takenaka said. “I told them I am not open to negotiation.”
—————
They left out the part where the Bank CEOs were on their knees and Takenaka was holding this big fucking samurai sword.
Takenaka. Takenaka. Isn’t he that little fucker on “Heros”?
February 14th, 2009 at 10:08 am
Re “One prominent line of argument I’ve heard against a “Swedish” solution to the financial crisis is the observation that the Swedish financial system was much smaller than the U.S. one, in virtue of the small size of the overall Swedish economy.”
—————
Bullshit. What Obama really said was that there were only five Swedish banks whereas America has thousands of banks.
Which was deceitful bullshit and Obama knew it. There may be thousands of banks but there are only Five Big Bad Banks. Those are the assholes you need to bitchslap.
Willie Brown once said that if you can’t take $100,000 from someone and then turn around and fuck them, then you shouldn’t be in politics. The Democrats, however, have taken more like $10 Million from these Five Big Banks and so are going all wobbly on us.
February 14th, 2009 at 10:09 am
The REAL question is what happens to those $170 TRILLION in Derivatives Contracts –almost all of which are held by the Five Big Bad Banks.
February 14th, 2009 at 10:50 am
What they call it doesn’t mean a thing. They are nationalized already. Some of their losses have been nationalized, in theory since congress is never going to fund them,and the government has supplied equity.
There is only one issue. Are the damaged or destroyed assets going to be sold at market clearing prices or liquidated. Or are they going to be hidden or otherwise held at pretend prices until the prices come back up. If it is the latter then we are looking at a Japan scenario. I don’t want to go all libertarian here but unless the markets are allowed to work we are screwed. Liqudate liquidate liquidate.
I can tell you AEI allowed this to go out because there is now growing body of support from people and institutions with cash to put to use who are now eager to start doing the vulture thing. The old corporate elites are now being abandoned and AEI is responding to their market. Over the years they could not put their tongues far enough up the anuses the old elites and now are ready to kneel behind the future ones. It helps that in many cases it’s the same people. It’s the one thing that is quite problematical. How to not let the destroyers now profit from the destruction. To certain extent it is inevitable.
February 14th, 2009 at 10:54 am
In this thread I’ve seen people toss out estimates of $50 trillion and $170 trillion for the value of bad derivatives held by the largest banks.
Where are people getting these numbers?
Isn’t the “GDP” of the entire planet ~$60 trillion or so?
February 14th, 2009 at 11:11 am
I feel like this nationalization debate is happening in a vacuum. I always see it phrased as “the banks.” Well, I’m assuming that doesn’t mean “all the banks.” I wish we could focus on what banks would need to be nationalized, and what this would mean for the banks that are not nationalized.
Enough with the platitudes and bring on some details about which banks we’re talking about here.
February 14th, 2009 at 11:19 am
Well Willie to a degree people are pulling figures out of the air. Which explains the spread. And one argument for nationalization is that without it we will never know because Wall Street has multiple reasons to lie.
But GDP does not equate with whole value.
I own my home which happens to be worth about 5 times my personal GDP.
The entire physical stock of the US is worth much more than our GDP of 14 trillion. One hopes, hah hah.
But your question really does go to the heart of the crisis…
debt bearing no measurable relation to value.
February 14th, 2009 at 11:34 am
The suggested total value of the over the counter, OTC, credit derivatives runs above 200 trillion by some. It is always noted, truthfully but cunningly, that those numbers are the ‘nominal’ values. Something I don’t want to get into but when ever you see that nominal just replace it with pretend values and you will be hitting the mark. The ‘nominal’ values were pretend values to begin with which is why they whole house of cards collapsed in the first place.
Virtually all derivatives including exchange traded options, many futures, ETF’s and ETN’s and most OTC options should be eliminated. Period. Save that they should be taxed at an unfavorable rate. Certainly higher than ordinary income. Speculation should always be taxed at a higher rate. For two generations we gave tax advantage to speculation and look where it got us. There is an entire body of work produced over two generations ‘proving’ that derivatives lead to increased ‘efficiency’. They were efficient alright. At transferring wealth and destroying the very foundation of the markets.
February 14th, 2009 at 11:40 am
Re Willie’s comment “In this thread I’ve seen people toss out estimates of $50 trillion and $170 trillion for the value of bad derivatives held by the largest banks.”
—————
The roughly $176 Trillion is for Derivative Contracts held by US Banks. 97 percent of that is held by Five Big Bad Banks.
The total notional value of Derivatives for the entire planet is around $600 TRILLION.
Source: http://www.occ.treas.gov/ftp/release/2008-152a.pdf
(Page 1 )
Note that that is Notional value. The amount actually at risk depends upon the terms and the economic environment. A number of the derivatives offset each other. However, that works only so long as all parties carry out their obligations. What worries officials are the various types of risk. E.g, counterparty risk –where one of the parties goes bankrupt — like A big US bank, for example.
Look at page 25, Table 4 of the above link. JP Morgan is holding $87 Trillion of Derivatives and JP Morgans assets are around $1.7 Trillion. In theory, however, JP Morgan is only exposed to $562 Billion of loss. If all parties meet their legal obligations.
Consider the following case: I loan Joe $100 and Joe Loans Willie $100 and Willie Loans Me $100. Alan Greenspan would argue that there’s no money at risk since all the loans cancel. But suppose Joe ups and runs off to Mexico — leaving me holding the bag for the money I loaned him. Then Willie calls me up and wants to know when I’m going to give him his $100 back.
Wait , it gets worst. Actually, Willie gave me the $100 in exchange for me guaranteeing that Joe would pay Willie back that $100,000 that Joe also borrowed from Willie. And I agreed because Joe gave me collateral — that home down in the swamps of Florida.
PLus I don’t really give a shit — I’m just some worker bee on Wall Street and I get $25 of that $100 that I brought into my business as a Commission. I AM NOT on the hook to pay off Willie — the Firm I work for is.
And my boss, the Firm’s CEO, told me that he’s waiting for his $10 cut on the deal and that I should be “realistic” in my Risk Analysis.
I did check once with a guy at the Fed about this but he told me Alan Greenspan was reading Atlas Shrugged and wasn’t taking any calls from Whistleblowers.
February 14th, 2009 at 11:52 am
Correction: Bank of International Settlements say total amount of Derivatives contracts worldwide was $684 TRILLION as of June 2008 . (They haven’t released more recent data, for some reason.)
Ref: http://www.bis.org/statistics/otcder/dt1920a.pdf
Above is item one from main report at :
http://www.bis.org/statistics/derstats.htm
February 14th, 2009 at 11:57 am
On the WSJ’s op/ed page this week, Andy Kessler recommended nationalizing BofA and Citi (although he recommended quickly re-privatizing them after replacing their management teams and boards of directors). I doubt Obama’s reluctance to do this is due to any ideological concerns; it’s more likely due to the enormous cost. His advisers are probably afraid that it would spook the bond market to expand the deficit by that much more in fiscal ‘09, so the plan might be to try to muddle through until next year instead.
February 14th, 2009 at 12:03 pm
Re “so the plan might be to try to muddle through until next year instead.”
———–
The OCC link I gave above indicates that roughly $60 TRILLION of the Derivatives contracts held by the top five US banks come due within the year. Not all of those require outlay of money, of course. A fair number may simply expire.
What would be interesting to know is how sensitive the cost to the banks is to interest rates. I.e., will Citibank squeal if US Treasuries long term rate starts rising? Is Bernanke holding down the rates — at the risk of inflation — in order to keep the five big banks afloat until some of the derivatives expire? Plus obviously the default rate on subprime mortgages is heavily affected by ARMs being ratched higher if interest rates rise.
February 14th, 2009 at 1:08 pm
Thanks Don.
I guess step two is “stress-testing”.
February 14th, 2009 at 1:52 pm
Two years ago, the idea that BofA and Citi would be lumped together like this would have been a surprise to a lot of observers (and BofA shareholders, a group that happens to include Warren Buffett, via Berkshire Hathaway). Citigroup was always something of a big mess, but BofA had been one of the better-run large banks in America. Then its CEO went on a hubris-fueled acquisition binge collecting time bombs like Merrill Lynch.
February 14th, 2009 at 2:29 pm
You will notice that the latest OCC statement –that I linked to above — is from Sept 2008. Note one of the Big Banks holding the derivatives: Wachovia. Ring a bell?
What is truly hilarious is that Citibank was offering to “rescue” Wachovia back in November — in exchange for a lot of government subsidies and guaranees. Citibank threw a legal hissy fit when Wells Fargo stepped in and acquired Wachovia WITHOUT requiring those promises from the US Government.
It’s now obvious why — Citibank was looking for US Government support for itself, not just for Wachovia. Wachovia could have been used as a scapegoat/excuse for Citibank’s past fuckups and as justification for even more Government aid.
February 14th, 2009 at 2:36 pm
The only way the banks are going to get nationalized, is if the bankers go on TV and beg to be nationalized.
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