Should We Really Nationalize Banks - Or Privatize Congress?

With all the speculation on a government takeover of the banking industry, including Alan Greenspan's statement that "the U.S. may have to temporarily nationalize some banks until the industry is restructured," we should do some serious soul searching. America has a long tradition of respecting property rights and restricting government power from the private domain. Overt nationalization would be unconstitutional, but change is in the air…

In an interview with the Huffington Post, Sen. Chuck Schumer said that "failed 'zombie' banks, no matter what their size, should be taken over by the government, which should then wipe out shareholders, fire management, clean up the banks and quickly resell them into the marketplace." Schumer also declared this to be a bad last resort and should be stressed as temporary.

Debunking the notion of long-term government bank ownership, Schumer stated:

The government is not good at making these decisions and managing assets in general. It's a different way of thinking in government. The government bureaucrats make for bad bankers and you'd probably end up making it worse.

Comments like "wipe out shareholders" have literally been wiping out shareholders, tearing apart some of the banks speculated to be in Congress's cross-hairs:

Senator Schumer is right that government would not be good at running banks. What is left out from the discussion, however, is that Congress has been doing a terrible job managing its own affairs. Many banks may be at, or nearing, insolvency, but Congress has long ago led America towards a similar fate. Consider the $10.8 trillion in public debt, the $1.2 trillion budget deficit this year, $52.7 trillion in unfunded liabilities for Social Security, Medicare, and medicaid, as quick examples of how well government runs its own business. If Congress followed the same accounting rules as the private market it purports to oversee, all its members would be fired and possibly thrown into prison.

Now we must ask ourselves why banks are insolvent? Why did they take on so much risk? Was it greed, bad business, or incompetence? It may be all of these and more, but a critical factor in the equation is government. Between Congress, the Executive, and the Federal Reserve, business conditions were so warped, money supply so inflated, and incentives so distorted that we should have expected a good deal of malinvestment. In fact, given that nothing has changed in government's business model, we should expect to see more of the same in the economy.

Let's recap a few big mistakes government made that caused the financial meltdown:

• Federal Reserve set interest rates too low for too long, causing explosive growth in the money supply following 9/11
• Congressional mandates to Fannie (FNM) and Freddie (FRE) to expand subprime debt in their portfolios
• Expansion of Housing and Urban Development (HUD) programs to make it easy for low-income buyers to get loans

Even now, govenrment's solution is to encourage subprime loans with HUD, while Fannie Mae "drop[s] some credit-score requirements, reduce[s] income-documentation standards and waive[s] the need for appraisals in some cases."

Let's hold members of the Senate Banking Committee, and the House Committee on Financial Services (excluding Ron Paul) at least as responsible as banking executives. So really, why are we talking about nationalizing banks, rather than privatizing Congress?

Disclosure: long XLF

Comments

[Steve in Gr...:]

Thanks, Mr. Viglione. You have nailed it. The solutions are:

1) Restrict the Fed's ability to debase the currency as it did post 9/11/01 and as it is currently doing now.

2) Privatize or liquidate FNM and FRE and prevent the U.S. government from interfering in the mortgage market.

3) Reduce top marginal income tax rates. The U.S. currently has one of the most redistributive income taxes in the world.

4) Reduce the corporate income tax rates. The U.S. currently has one of the highest corporate rates in the world (and the most punitive system).

The likelihood of any of this happening for the next 2-4 years is zero. That's why sane investors are out of the equities.

Feb 22 11:37 AM

[lorddarley:]

Elected officials complain about CEO compensation. Agreed, it has been excessive in many cases. How do we get that information? It is disclosed on compensation tables and public releases in proxy statements, 10Qs, 10ks, and 8-Ks. We may resent it, but at least we can see it.

Where is the uniform disclosure counterpart for Congress and State legislators? Where do we see a coherent compensation table which quantifies the benefits of tax-free campaign funds, lavish defined benefit programs, and "affiliated" compensation paid for book deals, honoraria, and consulting.

Putting all that compensation into one place, according to uniform valuation methods, would be the first step to real reform. The thousands of elected officials, appointees, and sycophants have corrupted our democracy.

Fair compensation disclosure would be fought tooth and nail, assuming anyone with appropiate stature ever proposed this. So we complain like decapitated chickens, without the necesary information to show to voters and to engage in meaningful reform of government.

We abet corruption when we do not insist that politicians reports under the same standards they apply to the companies they "regulate."

LordD

Feb 22 11:40 AM

[woollyB:]

The Fed doesn't keep interest rates low or high, it always follows the market. Greenspan et al freely admit this, yet everyone continues to believe that the Fed controls interest rates.

Feb 22 01:28 PM

[Rob Viglione:]

I like all the suggestions, but would add that we reduce corporate tax rates all the way to zero. It's counterproductive to tax business and capital, and makes even less sense when we realize there is no such real entity as a "corporation". Rather, corporations are merely legal entities that represent real people who are already taxed: workers, shareholders, and consumers.

The only reason taxing companies has been enabled for so long is that stakeholders are one step or more removed from the tax man. Employees don't realize their wages are depressed, shareholders come to expect taxes on their profits, adjusting for after-tax targets, and consumers think of rising prices as just part of life. Worse, unemployed workers have no way of realizing they are unemployed partly because of the tax system!

It's all perverse, unfair, and renders the country less competitive and poorer in the long run.

On Feb 22 11:37 AM Steve in Greensboro wrote:

> Thanks, Mr. Viglione. You have nailed it. The solutions are:<br/>
>
> 1) Restrict the Fed's ability to debase the currency as it did post
> 9/11/01 and as it is currently doing now.
>
> 2) Privatize or liquidate FNM and FRE and prevent the U.S. government
> from interfering in the mortgage market.
>
> 3) Reduce top marginal income tax rates. The U.S. currently has
> one of the most redistributive income taxes in the world.
>
> 4) Reduce the corporate income tax rates. The U.S. currently has
> one of the highest corporate rates in the world (and the most punitive
> system).
>
> The likelihood of any of this happening for the next 2-4 years is
> zero. That's why sane investors are out of the equities.

Feb 22 01:53 PM

[Rob Viglione:]

We've moved into a political economy, where the new elites are of the government class. You'll see less accountability, and an increasing risk-adjusted compensation scale relative to the private sector.

You cannot exactly expect wolves to regulate their own behavior when in a hen house.


On Feb 22 11:40 AM Lorddarley wrote:

> Elected officials complain about CEO compensation. Agreed, it has
> been excessive in many cases. How do we get that information? It
> is disclosed on compensation tables and public releases in proxy
> statements, 10Qs, 10ks, and 8-Ks. We may resent it, but at least
> we can see it.
>
> Where is the uniform disclosure counterpart for Congress and State
> legislators? Where do we see a coherent compensation table which
> quantifies the benefits of tax-free campaign funds, lavish defined
> benefit programs, and "affiliated" compensation paid for book deals,
> honoraria, and consulting.
>
> Putting all that compensation into one place, according to uniform
> valuation methods, would be the first step to real reform. The thousands
> of elected officials, appointees, and sycophants have corrupted our
> democracy.
>
> Fair compensation disclosure would be fought tooth and nail, assuming
> anyone with appropiate stature ever proposed this. So we complain
> like decapitated chickens, without the necesary information to show
> to voters and to engage in meaningful reform of government.
>
> We abet corruption when we do not insist that politicians reports
> under the same standards they apply to the companies they "regulate."
>
>
> LordD
>
>
>
>
>

Feb 22 02:08 PM

[maeve3333:]

Term limits and outlaw campaign contributions .Give them a few tv and radio stations .No fault divorce, LBJ's welfare laws , the Domestic Violence Act .We no longer have a strong family unit in this country .Most legislators are lawyers .They write laws that favor their profession and the heck with you .Start shrinking the size of govt . In most cases it only exists to perpetuate itself . We are not that far from blood in the streets . I hate to say that but I believe it is near .The only rights we have are to write checks .

Feb 22 05:27 PM

[driftwood2:]

It wouldn't be unconstitutional. The reality is, if the government just came out and said "we're not going to support these insolvent banks", runs on the banks would happen immediately and afterwards, the government could legaly nationalize these banks that had insufficient capital. The only thing keeping some of these worse banks as going concerns right now is the implicit backing of the government.

Feb 22 06:57 PM

[NWA10000:]

Congress already has been privatized in Illinois, where Governor Blagojevich called for the appointment of a U.S. Senate seat to
the highest bidder.
Amazing what a friend of free market economics he has turned out to
be!
And look at New York...that story has yet to be told.

Feb 22 09:00 PM

[DW:]

Great article Ron

Feb 23 12:16 PM

[henarl:]

I see a lot of good ideas in the above comments on changing the way our government is being run by the present incumbents. Since I seriously doubt that the existing elected officials are going to enact any new restrictions on their power to maintain the status quo that they so obviously want, that only leaves us with replacing a majority of them with a new Congress and Administration more to our liking.

As far as I can see, there are only two ways to accomplish that: Thru elections, or by armed revolution. Since the first method has obviously not been working very well, and since I don't believe the public is really up for the second method yet, It would appear that we are stuck with our corrupt status quo government for the foreseeable future. Try to make the best of it.

Feb 23 02:00 PM

[Richard Col...:]

Spraying for leaf blight will not cure the root-rot:

A viable third party is the only answer for the Congress. When/if we ever aquire the courage to vote in a viable third party, then we can begin to make the changes.

It's time to FLUSH the Capitol Hill toilet __ it's been backing up for years.

Feb 23 02:17 PM

[refatx:]

"PRIVATIZE CONGRESS?" California would leave the Union (or at least I can hope)!

Feb 24 01:54 PM

[Doc 224899:]

The Best Argument Against Nationalizing Banks: The government that taxes you would also be the government that stores your money in its banks. Stop and think about how tyrannical our federal government would be if it could tax us any way it wanted, and directly withdraw funds from our bank accounts and place it in the government’s accounts. At any point that the government decided the citizens were being inconveniently unpleasant or insufficiently submissive it could announce a new tax was in effect and take whatever money it wanted from the accounts of citizens to pay the tax. Under such a government the citizens would become little more than slaves or serfs.

As it stands now, the Internal Revenew Service (IRS) is, for all intents and purposes, completely above the law. On the basis of whim or error it can declare any of us delinquent in paying our taxes, demand payment with penalty fees added on, and there is almost no possible way of opposing it even when it is wrong (and it is wrong about 50% of the time). If the government operating the IRS also operated the banks, we would all be entirely powerless to prevent it from taking our entire life savings at any moment.

Once American banks are nationalized, they will never become un-nationalized. It is fallacious and specious to say nationalizing banks would only be a temporary measure. The income tax was supposed to only be a temporary measure, and the federal government promised that the income tax would never rise above 1%, and we have seen how that worked out.

If we are at all concerned that the government robs us and wastes tax money on stupid programs that we find loathsome or insufferable or unconscionable, we should recognize that nationalizing banks would completely free the government to spend all our money on anything it wanted at any moment, and we would be powerless to prevent it.

The only safety any of us would have would be with private, Swiss-style banks. This would immediately result in a complete separation between the majority of people, who couldn’t afford such banks, and a small privileged minority who could afford them.

Mar 01 05:02 PM