Martin Wolf: Nationalize, Nationalize, Nationalize
The FT’s Martin Wolf continue to make the case for bold action of cleaning up the banking sector, and makes the point that if the United States were dispensing advice to a supplicant nation, we’d be urging them off the kind of wishful thinking that seems to be governing a lot of policymaking:
Assume that the problem is insolvency and the modest market value of US commercial banks (about $400bn) derives from government support (see charts). Assume, too, that it is impossible to raise large amounts of private capital today. Then there has to be recapitalisation in one of the two ways indicated above. Both have disadvantages: government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds. But the choice is inescapable.
If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. Dominique Strauss-Kahn, IMF managing director, said the same thing, very gently, in Malaysia last Saturday.
The stimulus bill has attracted the bulk of the commentary because I think most people feel more competent to talk about those issues. But I think the banking system issue is ultimately more important and more fundamental.
33 Responses to “Martin Wolf: Nationalize, Nationalize, Nationalize”
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February 10th, 2009 at 5:35 pm
yes they might, but would they point it out brutally to a foreign country that is the linchpin of the global economy?
I think the point of Geithner’s walking on eggshells is not to break the eggshells. He’s trying to be Greenspanesque. If he announces an imminent reckoning–even if he hints at one coming a year from now–the bottom could fall out by Friday. He may be wrong, but I think that’s his scenario. And he can’t SAY that, because even saying it will cause the house to fall.
February 10th, 2009 at 5:40 pm
You’re right, I don’t feel competent to opine on this subject.
And I have a pretty high opinion of myself.
Gulp. I hope Geithner’s right.
February 10th, 2009 at 6:11 pm
I know I’m not qualified, but here goes anyway.
The FT guy said
But I also heard Stiglitz say we are not controlling the banks at all. No real benefits of ownership. We = government.
Geithner will hopefully one day learn to deal with these Southern senators more on their own terms. Administration officials are at that new stage now when they’re just getting pushed around. Bill Clinton could give him a few tips about giving as good as he gets.
February 10th, 2009 at 6:14 pm
Nobel economist Joseph Stiglitz says we should let the big banks fail (chapter 11 or 13). Whether you nationalize the big banks or not, as long as they’re kept on life support the public winds up eating the cost. Debt default, write-downs, and write-offs are painful, but the alternative is propping up zombie banks on the public dime indefinitely. I don’t buy the idea we must do this to solve the “credit crisis”. But obviously “solving the credit crisis” in any way that sticks the plutocrats with their own bad bets will never be considered.
February 10th, 2009 at 6:18 pm
Shelby was for bankruptcy of the auto industry, wonder if he would be too for the banks?
February 10th, 2009 at 6:59 pm
You read it here first:
Obama is holding back on nationalization until the stimulus bill passes. Maybe 2-6 weeks after that, max.
February 10th, 2009 at 7:18 pm
When Wolf says: “If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally”, I have to assume that he that we shouldn’t pin this policy on Obama’s advisers. Which probably means that in Obama’s judgment, he simply can’t nationalize the banks right now.
I agree fully with Wolf and others that nationalization would be the best policy option, but that doesn’t necessarily make it feasible. A botched attempt — remember, these are huge and powerful institutions — would make things far worse. In a way, FDR had it easy by comparison; the situation was so far gone by 1933 that he had carte blanche to do just about anything, no questions asked.
I learned during the primaries and the election not to under-rate Obama’s political sense, so I’m willing to cut him some slack here, too. He has to deal with a crisis in the real economy, and another one in the financial sector, without undermining himself politically, and without spooking the investors who are going to be asked to stump up $1.5 trillion in net new financing this year and beyond. It can’t be easy, and it may be impossible.
Oh, and one aside before I go: there’s a simple explanation for the greater scrutiny the bailout package is getting. The numbers are smaller. People whose eyes go glassy at the mention of AIG’s third $47 billion dollop of Fed largesse find themselves on much firmer ground getting angry about $50 million grants for honeybee protection.
February 10th, 2009 at 7:48 pm
Re: Nobel economist Joseph Stiglitz says we should let the big banks fail (chapter 11 or 13).
Chapter 13 is for individuals. And banks are not allowed to do Chapter 11. If a bank fails it’s liquidation– which basically means that the FDIC does take over (i.e., nationalize) the bank, at least until a buyer can be found. However the problem here is that we’re not likely to find a buyer for Citibank (or anything else that size), so we’ll end up with Citi on the public books for a good while.
February 10th, 2009 at 7:49 pm
Someone out there really needs to explain why the existing mechanism for dealing with failing banks is not being utilized.
The problem is with like 4 banks that are way too large and made really bad decisions and are on the verge of failure.
We have, and have had for several generations, a government agency who’s job is to deal with failed banks.
The FDIC.
Let them fail. The FDIC sees that they are insolvent, steps in (usually at the close of business on Friday), shutters the bank for the weekend, changes the letterhead to say…oohhh…Citi Federal Bank for example…and then re-opens the doors on Monday.
The bank is then subjected to a big investigation/audit, the remaining assets are divied up amongst the creditors and the bank goes away.
We don’t even need to worry about pressing for a much needed anti-trust case against these banks.
There are plenty of smaller, regional banks which exercised due diligence, and properly risk analysis that will be ready to step in.
That’s how the system is designed to work. Let it work. Bank Nationalization isn’t new. We just nationalized a few small banks over the weekend that acted like Federal Bank of America.
February 10th, 2009 at 8:09 pm
Correct me if I’m wrong, but I believe the FDIC is beside the point, because these “banks” we’re talking about aren’t federally-insured deposit institutions, but rather, investment banks.
Or, at least, they’re mostly investment banks.
I know there’s no Goldman Sachs ATM in the Lowell Highlands.
February 10th, 2009 at 8:10 pm
Declare insolvent, close, and liquidate. Bye bye equity, bond holders get a giant haircut. Next time, before investing in a bank, make sure they require 20% down on a home loan.
From Wikipedia…
The Resolution Trust Corporation (RTC) was a United States Government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision, as a consequence of the savings and loan crisis of the 1980s…
…Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion.
February 10th, 2009 at 10:51 pm
I’m with Jerry101 and have been for a while–see link in my name. “Speed bankruptcy” by way of the FDIC was always the best idea: You can do it via debt for equity swaps (easiest) or an FDIC auction where the auction winners pay off the debtholders as with WaMu.
And for DTM:
Citibank ostensibly has $2 trillion in assets, but only $700 billion in worldwide deposits. So almost 2/3 of Citi could be pure junk and it could still pay off depositors. Just check their 10-k or 10-q online to verify my claims.
Best of all: Citi has $350 billion in long-term debt on the books—heck, Sheila Bair could convert those bonds into common shares through mental telepathy if she just thought about it hard enough….
Oh, and Luigi Zingales of Chicago GSB has been leading the bankruptcy bandwagon for months as well: If you want to see what “ahead of the curve” reads like, just check out his website….
February 11th, 2009 at 12:52 am
Todays outline of a plan fails to address a central and perhaps the critical issue of the current crisis – bank insolvency. Even if the Treasury can get private capital to purchase bank assets (by providing downside protection and cheap credit), they have to solve the solvency problem. Banks levered 30 to 1 and face severe price declines and are accumulating staggering losses. Unless the government subsidizes a comparable amount of leverage and downside protection (which props up the price the market is willing to pay for bank assets), then banks won’t receive enough capital in exchange for their assets to achieve solvency. In short, I doubt that this plan solves the solvency problem.
See more at incomeeffect.blogspot.com
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