Marc Gerstein

Bank Nationalization: It's Just Plain Wrong

This article pre-supposes that the banks acted in good faith but that things went wrong and that they need to get corrected in the normal course of business practice. However, the more we learn about what the banks did, the less viable the good-faith assumption is. The more we learn, the more apparent it's becoming that the Wall Street investment bankers and analysts of the late 1990s-early 2000s where choir boys compared to the commercial bankers who, to put it simply, knew they were lending other people's money, knew they could personally benefit magnificently if things went well, and had complete confidence that they'd never be held personally accountable if things went bad. Now THAT's toxic.

Banking is not just another business with the usual ebbs and flows, and successes and failures. Instead, the banking system is the like the circulatory system of the body of capitalism. If the banking system breaks, so, too, des everything else. Hence, unlike CLECs circa-2000, failure is not an option.

Considering how the banking private sector, after getting more fredom in this past generation (a looser regulatory system) used it to blow up the system, it seems that government has no choice but to step in to manage the crisis in the short term and give some serious dogma-free consideration to what role, if any, the private sector can and should continue to play in banking.

It may be premature to suggest nationalization is the answer. Perhaps a much more tightened regulatory setup will do. (Yes, regulators are not great decision makers, but how much worse could they be than what private-sector bankers have already done? At least bureaucrats won't have financial incentives to get so reckless with other people's money. Dull and unimaginative, which is what we'd likely get, would be a major improvement.) But whatever the case, it's way too early to dismiss nationalization as at least one potentially plausible solution.

But I do agree with NITRAM in one area: criminal prosecution of wrong-doing bankers at all levels of the organizations (not just the CEOs). It shouldn't take too much imagination to bring all this under the larceny statutes; theft of shareholder money and theft of FDIC funds with "willfull recklessness" providing the requisite criminal intent. Throw in a dash of RICO, and perhaps the private sector would be so scared straight we wouldn't even need nationalization or increased regulation.