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