Reading as President Obama talks himself into and out of bank nationalization makes you think we should all be charging for some sort of economic psychoanalysis. The following quotes are from a small press gaggle on Friday. Read it in two parts, starting with this:
As you pointed out, sort of along the spectrum there are two ways of handling this. There’s the Japan model -- as I said, they sort of papered things over, never really bit the bullet, took their medicine, and so you never got credit flowing the way it should have and the bad assets in their system just corroded the economy for a long period of time.
Sweden, in contrast, took over their banks and took out the bad assets and then resold the good banks, the fixed banks, to private hands. And they were up and running pretty soon.
Whoa, Obama got there. And he explained why some species of temporary nationalization makes more sense than continuing to shovel money into insolvent banks, especially when the alternative is a Japan-style lost decade with Zombie banks roaming the financial landscape.
But wait, he starts to backslide:
And as I said when I was asked about this the other day, you can make a good argument for the Swedish model, except for this fact: They only had a handful of banks. We’ve got thousands of banks. The scale, the magnitude of what we’re dealing with is much bigger. We’ve got global financial markets that are reacting in all sorts of unpredictable ways. And so what we have to do is to we have to pull the Band-Aid off so we don’t duplicate what happened in Japan. But we’ve also got to make sure that in pulling the Band-Aid off we don’t just start doing so much damage that things end up getting much, much worse.
Oh, ugh. As soon as he had crossed over and made sense, there he goes dropping off the other side again. The issue is not the number of banks, as I said in a post on this same subject here over the weekend. The top five U.S. banks by assets account for more than 70% of the assets in the U.S. banking system. That there are a bazillion teensy banks that may or may not be solvent is not the issue. Matter of fact, those smaller banks are ones for which we already have an effective process, the one that FDIC now administers on a weekly basis for failed banks.