Is Bank Nationalization Still an Option?

John Hempton says that I'm misrepresenting his views. He doesn't think that the banks should just be allowed to muddle along indefinitely: they should be subjected to price discovery (eg the Geithner plan) and then nationalized if they're found to be insolvent:

I never advocated that muddle through is the right policy. I just happen to think that muddle through will work for most banks because most banks are not that insolvent.

I'm not convinced that the Geithner plan will be particularly great when it comes to price discovery, because correlation is at 1 right now, meaning that differences between good and bad assets get elided, and also because the plan is structured so that you can make a profit even when you overpay. I'm also not convinced that the biggest banks are as solvent as John thinks they are, but he and I have been back and forth on this already, and there's no point in repeating all that.

On the other hand, Ezra Klein has five excellent reasons why it's a good idea to bring in private investors all the same, including this one:

Getting private investors to buy-in to this stage of the recovery plan might make it easier to ensure their cooperation with later stages. It may effectively co-opt the participants. Nationalization is one example. If TIAA-CREF vouches for insolvency, the market is likelier to think nationalization an act economic necessity than political capriciousness.

Brad DeLong says something similar:

I suspect that at least one of the reasons the Obama administration is not nationalizing the banks right now is named "Voinovich": getting 60 votes in the Senate for bank nationalization is no easy task with this Senate until the administration can demonstrate that it has gone the extra mile.

I'm not sure I buy it: this plan is not a necessary precursor to nationalization, and the government has given no indication whatsoever that nationalization is its last resort. Yes, it might be a tiny bit easier if this plan fails. But that can't possibly be a good way of getting there from here.

Comments

[balabanovj:]

Felix, at the risk of being politically incorrect, I think you're an absolute moron. Have a nice day!

Mar 24 04:22 AM

[ebschor:]

Absolute moron? You're too nice! He's an absolute moron and probably short a whole boatload of financial stocks.

Mar 24 06:42 AM

[normthefedup:]

FINALLY...I HAVE SOME ALLIES!!!!!!!!!!! I've been screaming the two commentors sentiments since the first time this idiot started his "nationalization of the banks" campaign. Felix, I actually thought I'd have at least ONE day of not reading your negative misinformed rhetoric. No such luck. Nationalization. PUT IT TO BED. FIND SOMETHING ELSE TO BEAT TO DEATH. SOME OF US ARE ACTUALLY RETIRED AND HOPING FOR THE INCOME FROM FINANCIAL STOCKS AND MUTUAL FUNDS TO CONTINUE TO PAY FOR THEIR FOOD. I hope, I mean I really really really hope, that at some point in the future, after I'm dead and buried and you're my age, that some self-appointed experts and those of your ilk, help to destroy your portfolio. It's just time for you to shut the hell up.

Mar 24 09:34 AM

[Larrysyr:]

There is almost zero political backing for nationalization. Obama is far too smart a politician to fall into the "socialist" label, and he has said this will not happen.

The current policy is consistent and avoids the pitfalls of outright nationalization. Obama has never wavered on this point, and it's time to put it to bed and move on to a debate that is still open.

Mar 24 10:55 AM

[Lilguy:]

I still think the Geithner Plan is ill-conceived and will ultimately cost the American taxpayer at least the trillion dollars being pledged. Moreover, if this plan fails to rejuvenate the banks--as I think most experts believe it will--the United States (Treasury, Fed, and anyone else in the USG) won't have any capital or credit left, and we'll have to nationalize the banks. It won't be a matter of having tried and failed, it will be an absolute national economic security imperative.

What is really irritating is that I don't think we need to risk that trillion dollars to prove that some very large banks are insolvent. Certainly well-planned and executed "stress tests" would do the job. So my hope in all this is that there is another level to the ongoing stress tests that has not been publicly disclosed (there always is something that's not disclosed) that will give Treasury the ability to make a thumbs up-thumbs down assessment of each bank's solvency.

The sooner we go through the so-called "pre-privatization" process, the better off our national economic security will be. It will slow the increases in national debt, ease pressure on taxes for generations, and enable the USG to focus on Main Street, not Wall Street.

Mar 24 10:56 AM

[jack kreg:]

nationalization is dead, finally, the Bolshevik's have been driven back into the sea, hopefully gone forever.

Mar 24 11:37 AM

[ain't no fo...:]

I'm a fan of the Swedish plan. Quite frankly, if it hurts the holders of equity in a few insolvent large banks, too bad, it will get things moving, finally.

As I wrote about a week ago:

"I like the concept of using "triage" instead of nationalization for the banks. In fact, I actually don't care WHAT they call it.

Meanwhile everyone worries and frets and complains that the nationalization of C and BAC would ruin the the common shareholders.

Hmmm... let's think about that swell logic.

Late spring/summer 2007: C trades in low 50's and BAC trades in upper 40's.

Yesterday: C trades in mid 1's and BAC trades in mid 2's.

I would submit that anyone who has been living in a cave or in denial in a psych ward for the past 18 months using the totally discredited philosophy of "buy and hold" has already been ruined rather completely.

They've suffered 95 - 98% losses- that isn't ruination?

And any "bargain hunter" who adhered to the "falling knife" syndrome of buying a collapsing financial stock in the worst financial meltdown at least since the Great Depression is just as clueless in my opinion.

Those people didn't adhere to a single risk management or loss prevention/control rule on the planet.

I would further submit that anyone who has ridden these turds down the past 18 months is a total moron who deserves to have been ruined... in fact, they should just make it a law that people like that can't be allowed to invest ever ever again - they should all go around with a big red tattoo inked on their forehead that says: I'm a Moron!!!!!" in 3" letters.

And every day CNBC should guest interview a couple of them and make them explain to the world why they held those turds the whole way down.

And they should start with the advisors who recommended the stocks and keep recommending those stocks for the whole collapse, pulling in the sheep with their glittering logic and salesmanship.

No one seems to want to bail out stupid, greedy housing speculators.

So why should stupid, greedy bank stock speculators be bailed out to prop up a couple of failed institutions while the entire banking system stays locked up watching this nightmare unfold, and lots of innocent institutions get dragged down with them?"

Have at it kids.

dragon

Mar 24 01:54 PM

[Buckoux:]

"Bolshevik's " are like the "poor". That is, they will always be with us.
Now, we just call them "control freaks".

Mar 24 02:02 PM

[Buckoux:]

wpdragon: "I'm a fan of the Swedish plan."

Of course you are because you're a socialist, which is just another name for a moron. Sweden is a tiny country with a tiny population of less than 10 million people. US population, by comparison, is 309 million, over thirty times that of your glorious, socialist, Sweden. The "Swedish plan", as well, only involved an equally puny number of banks when compared to the USA. Furthermore, the Swedish banks were national, not international, and the Swedes did not risk shutting down the world economy in the late '80 and early '90's, as does America now.

Go back to your books and extrapolate your inappropriate cures from the dubious history tiny nation-states that are, in fact, smaller than some counties in the US. Better yet, leave your mothers house and travel to non-tourist Europe and ask yourself if you truly want to live that way.


On Mar 24 01:54 PM wpdragon wrote:

> I'm a fan of the Swedish plan. Quite frankly, if it hurts the holders
> of equity in a few insolvent large banks, too bad, it will get things
> moving, finally.
>
> As I wrote about a week ago:
>
> "I like the concept of using "triage" instead of nationalization
> for the banks. In fact, I actually don't care WHAT they call it.
>
>
> Meanwhile everyone worries and frets and complains that the nationalization
> of C and BAC would ruin the the common shareholders.
>
> Hmmm... let's think about that swell logic.
>
> Late spring/summer 2007: C trades in low 50's and BAC trades in upper
> 40's.
>
> Yesterday: C trades in mid 1's and BAC trades in mid 2's.
>
> I would submit that anyone who has been living in a cave or in denial
> in a psych ward for the past 18 months using the totally discredited
> philosophy of "buy and hold" has already been ruined rather completely.
>
>
> They've suffered 95 - 98% losses- that isn't ruination?
>
> And any "bargain hunter" who adhered to the "falling knife" syndrome
> of buying a collapsing financial stock in the worst financial meltdown
> at least since the Great Depression is just as clueless in my opinion.
>
>
> Those people didn't adhere to a single risk management or loss prevention/control
> rule on the planet.
>
> I would further submit that anyone who has ridden these turds down
> the past 18 months is a total moron who deserves to have been ruined...
> in fact, they should just make it a law that people like that can't
> be allowed to invest ever ever again - they should all go around
> with a big red tattoo inked on their forehead that says: I'm a Moron!!!!!"
> in 3" letters.
>
> And every day CNBC should guest interview a couple of them and make
> them explain to the world why they held those turds the whole way
> down.
>
> And they should start with the advisors who recommended the stocks
> and keep recommending those stocks for the whole collapse, pulling
> in the sheep with their glittering logic and salesmanship.
>
> No one seems to want to bail out stupid, greedy housing speculators.
>
>
> So why should stupid, greedy bank stock speculators be bailed out
> to prop up a couple of failed institutions while the entire banking
> system stays locked up watching this nightmare unfold, and lots of
> innocent institutions get dragged down with them?"
>
> Have at it kids.
>
> dragon

Mar 24 02:34 PM

[vreporter:]

It was NEVER an option.
It is an unlikely possibility even as a last resort.
Meanwhile, those very bank stocks have outperformed everything else by MULTIPLES during this ongoing proposal for nationalization.
Well done Felix... you are a true contrarian indicator.

Mar 24 10:47 PM