US Banks: Nationalization? Pre-privatization?

August1991 · February 19, 2009

Roubini's claim to fame is that he predicted the collapse of this financial bubble. Roubini now argues that the US federal government should nationalize the banks, as Sweden did in the early 1990s when it faced the collapse of a similar bubble.

As msj has noted elsewhere, even Alan Greenspan is considering the possibility of nationalization:

"It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," Greenspan told the Financial Times in comments published on Wednesday.
"I understand that once in a hundred years this is what you do," said Greenspan, a champion of free markets who is revered by many influential Republicans.

Reuters

Bernanke too seems to have drunk the koolaid:

Federal Reserve Chairman Ben Bernanke said Wednesday that there would be drawbacks to the federal government nationalizing banks and the Obama administration remained committed to "return them to private hands" quickly if nationalization became necessary.
"As a general rule, it's very challenging for governments to manage banks for a protracted period," Bernanke told a sold-out luncheon crowd at the National Press Club. "There is the additional problem if you have a government-run institution, you tend to lose their franchise value, and counterparties don't like to deal with you because they don't know your future.

Link

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Roubini is no Friedman nor Keynes nor Samuelson. Roubini isn't even a Coates nor a Lucas. Neither is Bernanke/Krugman of the calibre of a Coates or Lucas.

In addition, we live in the world of the quick fix. I fear that Obama and his crew, and the US Congress, will fall into a trap of seeking a quick fix when the problem is not clearly understood.

Nationalization may well lead to worse than the current problem. (Roubini reminds me of Soros - a lucky gambler, with no coherent theory to explain his luck.) Then again, nationalization may work. I dunno.

At the moment, I think depositors should enjoy federal protection and bank managers should face bankruptcy. I do know that the US will survive this financial crisis, and the inexperience of the Obama Administration. Obama said that only the US federal government was an institution large enough to deal with this financial crisis. Well, he's wrong. The US is much more than the federal government. The US will survive this financial crisis, and survive the inexperience of the Obama Administration.

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Sweden? Consider this.

The idea of a Bad Bank appears to get more and more popular day by day as a solution to all kinds of problems in countries suffering from banks paralysed by toxic assets. Often the Swedish experience of bad banks in the early 1990’s is used as an example of how great this idea is. Some times the lessons derived from our experience are based on misunderstandings of what we actually did, and how our system worked.
...

In 1994 I became State Secretary for Financial Affairs in the Ministry of Finance, at a time when the recovery from the crisis appeared on the horizon, following the abolition of the fixed exchange rate, the ensuing large depreciation of the Krona and lower interest rates. The new Government put in place an effective and very big program to get rid of a budget deficit of some 12% of GDP. Gradually, this started to affect confidence, and the interest rate markets began to function again.

Link

The Swedish Krona lost about 30% of its value. (Maybe that explains why the Swedish model worked.) Are Americans prepared for such a devaluation? Would such a devaluation even work? (Nixon imposed a 15% import surtax in 1971. Maybe Obama should consider such a policy.)

Are Americans prepared to deal with their large budget deficit, as Sweden did?

Sweden's financial problems in the 1990s were related to its fixed exchange rate and the EMU. Sweden solved many problems by floating the krona, not by nationalizing banks.

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I fear that Roubini and others (even an aged Greenspan) have no idea how complicated nationalizing American banks could be. US federal bureaucrats cannot conduct so-called "stress tests". There is a large divide between what a politician promises and what the bureaucrats eventually deliver.

Edited February 19, 2009 by August1991

eyeball · February 19, 2009

There is a large divide between what a politician promises and what the bureaucrats eventually deliver.

Hmmm, this is probably why we're in this mess too. Go figure.

msj · February 19, 2009

How convenient.

Now it is an "aged" Greenspan who wants to nationalize some banks and, since you disagree with your former hero, he is "aged."

Nice.

I don't know why you have this need to compare Roubini, Krugman and Bernanke to other economists - such name dropping proves very little and, if anything, demonstrates you to be a headline reader rather than one who can read and understand details for him or herself.

For those interested in some serious reading on this topic I can recommend the following links as a starting point:

Nationalization Gets a New, Serious Look

Obama on Nationalization

The Growing Chorus for Nationalization

Nationalize the Banks! We're all Swedes Now

As for the costs of nationalization versus not nationalizing - well, gee, the US has already put up $8+ trillion in guarantees and/or costs.

No kidding the US is going to see problems with their currency and deficits. Um, this has already been happening for the past 2+ years.

There are other ways to deal with it - do what Bush and now Obama have been doing - TARP and various other programs that are nothing more than band aids and only delays the market from dealing with bad assets like Japan did.

And that is just it - the US is throwing taxpayer money at the problem anyway. It just isn't very effective because there is no coordination and the government has continued to react rather than be proactive which, of course, just prolongs the crisis turning it into something closer to Japan than Sweden.

I recommend reading the first few pages of this PDF regarding Japan and the US to get a sense of what the costs are going to be like whether we nationalize or not.

The point is simple - we can let them all fail (I'm not adverse to this idea as long as it is done as quickly as possible), we can do the slow waltz al la Japan and stimulate the economy with spiraling fiscal deficits and slowly write down the bad assets (the idea being that the slow write downs are over a long enough length of time as to eventually bring about solvency to the system) or we can attack the worst of the bad assets (i.e. get rid of the bad assets in one fell swoop so that the system can get back on its feet again by using the remaining good assets).

No matter what solution is finally used there will be costs for which anyone's guess is as good as the next.

For now, I would prefer people to read up on this topic by reading the likes of Krugman, Roubini, and others and then making up their own minds.

August1991 · February 19, 2009

There are other ways to deal with it - do what Bush and now Obama have been doing - TARP and various other programs that are nothing more than band aids and only delays the market from dealing with bad assets like Japan did.
And that is just it - the US is throwing taxpayer money at the problem anyway. It just isn't very effective because there is no coordination and the government has continued to react rather than be proactive which, of course, just prolongs the crisis turning it into something closer to Japan than Sweden.

msj, have you ever worked in government? Have you ever been a bureaucrat?

I worked in Ottawa for about six years. Your criticism of what the US government is doing is really a criticism of bureaucracy. msj, you (and Roubini) are under the false illusion that there is a deus ex machina that can solve this problem.

It ain't so simple, and yet I suspect that Roubini to his dying day will believe that no one followed what he prescribed.

For those interested in some serious reading on this topic I can recommend the following links as a starting point:
...

Of your four links, two are from CalculatedRisk and the other two from the New York Times and the Washington Post.

msj, to your dying day, you will believe.

Edited February 19, 2009 by August1991

bush_cheney2004 · February 19, 2009

....It ain't so simple, and yet I suspect that Roubini to his dying day will believe that no one followed what he prescribed.

Moreover, it is silly to think or even expect that the very apparatus that created the "crisis" will develop and implement an effective solution. A "Darwinian Flush" is sounding better by the day.

msj · February 19, 2009

Of your four links, two are from CalculatedRisk and the other two from the New York Times and the Washington Post.
msj, to your dying day, you will believe.

Oh, I believe all right.

I believe that one has run out of arguments when they whine about the sources rather than attack the substance of the sources arguments.

msj · February 19, 2009

Moreover, it is silly to think or even expect that the very apparatus that created the "crisis" will develop and implement an effective solution. A "Darwinian Flush" is sounding better by the day.

Sure, let's do the flush - get rid of the incompetent bankers, CEO's, shareholders and debt holders who allowed this type of crisis to emerge.

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The government will not allow the market to fix itself even if the market were really a free market.

So, the government can either throw money into ineffective solution after ineffective solution (fiscal stimulus, TARP, mortgage bailouts, industry bailouts etc...) or it can come clean and get it over with in one fell swoop.

That's the thing about nationalization - at least it is honest. Buying up AIG and guaranteeing trillions is not.

Anyway, some more (pro and con) nationalization links for those interested (see bottom of the article):

Nationalize Like Real Capitalists

jdobbin · February 19, 2009

Then again, nationalization may work. I dunno.

That's a lot of hedging there.

At the moment, I think depositors should enjoy federal protection and bank managers should face bankruptcy. I do know that the US will survive this financial crisis, and the inexperience of the Obama Administration. Obama said that only the US federal government was an institution large enough to deal with this financial crisis. Well, he's wrong. The US is much more than the federal government. The US will survive this financial crisis, and survive the inexperience of the Obama Administration.

Henry Paulson's "moral hazard" philosophy took a major hit when he let Lehman Bros. go under.

The banks certainly got the idea that there was no one too big to fail and promptly stopped lending to even the soundest of financial institutions. The stock market crashed and had the government not acted immediately, we most certainly would have seen AIG go belly up along with many other financial institutions. That would have tightened things up even more for lenders.

Bush and Paulson were certainly looking at a Depression-like reaction.

I know that for some conservatives (like Paulson) that if it is a choice between government and no government, they choose no government. I suspect it is the same for many radical right here.

Essentially, you sound like you believe in a massive die out in the free market with banks, manufacturers and others going into bankruptcy or like many other industries just shuttering their doors. Many of the conservatives seem to be inured to the suffering this might cause and the chaos that might ensue.

GostHacked · February 19, 2009

Here is how it can work

Nationalization = socialism = communism. Well according to bright minds like Glen Beck .. lol

sharkman · February 19, 2009

I don't know very much about this topic, aren't Canadian banks nationalized?

Smallc · February 19, 2009

I don't know very much about this topic, aren't Canadian banks nationalized?

:lol:

Huston · February 19, 2009

Here is how it can work
Nationalization = socialism = communism. Well according to bright minds like Glen Beck .. lol

Well, nationalization would be Facism... Nazi, where nazi is the short form of National Socialism. So to answer the question, yes!

GostHacked · February 19, 2009

I don't know very much about this topic, aren't Canadian banks nationalized?

Even our 'national bank' is a privately owned entity. And no, no banks here are nationalized as far as I know.

Huston · February 19, 2009

Even our 'national bank' is a privately owned entity. And no, no banks here are nationalized as far as I know.

And they won't be, since the 'global leaders' are not supporting protectionism. They will most likely be globalized.

August1991 · February 20, 2009

Henry Paulson's "moral hazard" philosophy took a major hit when he let Lehman Bros. go under.

Dobbin, you fail to understand that moral hazard is arguably the reason the US is in this mess. In one view, when Greenspan decided to smooth the rocky ride after the 1987 stock market collapse, and the tech bubble burst of the in the early 2000s, he was inadvertently telling US players that they could do whatever they wanted and the Fed would bail them out.

What I find remarkable is that many US banks are perfectly sound. This article makes an interesting inventory:

U.S. Treasury Secretary Timothy Geithner last week proposed a series of programs, totaling $1.5 trillion, to bail out the U.S. banking system. Of course, Geithner hasn’t told us precisely how he plans to spend the money, or identified which banks require such an enormous outlay.
So I thought it was worth looking at the United States’ 12 largest banks to see where the problems might be and identify which banks might need big infusions of government cash. I perused the financial statements of all 12 banks, and also looked at their market valuations.

Alpha

jdobbin · February 20, 2009

Dobbin, you fail to understand that moral hazard is arguably the reason the US is in this mess. In one view, when Greenspan decided to smooth the rocky ride after the 1987 stock market collapse, and the tech bubble burst of the in the early 2000s, he was inadvertently telling US players that they could do whatever they wanted and the Fed would bail them out.

I disagree. It was the cavalier attitude toward regulatory oversight that led to the problem.

msj · February 20, 2009

Dobbin, you fail to understand that moral hazard is arguably the reason the US is in this mess. In one view, when Greenspan decided to smooth the rocky ride after the 1987 stock market collapse, and the tech bubble burst of the in the early 2000s, he was inadvertently telling US players that they could do whatever they wanted and the Fed would bail them out.

Good of you to finally start realizing Greenspan's role in this.

What I find remarkable is that many US banks are perfectly sound.

This is not remarkable at all. It is exactly why some were calling "BS" on Obama's statement about the US banking system being so much different as compared to Sweden's.

Yes, the US has thousands of banks for which hundreds will end up going under (most of those are small banks are do not threaten the system).

But it is probably less than 30 banks where the real (i.e. large bad assets) are being held and are making the entire system appear to be insolvent. Those are the banks that have to be dealt with - whether it is TARP, TALF, or nationalization.

msj · February 20, 2009

I disagree. It was the cavalier attitude toward regulatory oversight that led to the problem.

You're both right - a combination of ineffective regulation and an attitude of Greenspan being there to bail out the market every time there was a problem created an atmosphere where risk need not be considered.

The regulators weren't looking on the one hand, and whenever the s&it hit the fan, on the other hand, then Greenie was there to hold the markets hand.

And some people think that this kind of system is a "free market" and should be left to its own devices to "self-correct." :rolleyes:

bush_cheney2004 · February 20, 2009

....And some people think that this kind of system is a "free market" and should be left to its own devices to "self-correct."

Correct....because that is exactly what whould have happened over a longer timeline.....the rest is just politics as usual. Macroeconomics doesn't always have to be pleasant.

Oleg Bach · February 20, 2009

You're both right - a combination of ineffective regulation and an attitude of Greenspan being there to bail out the market every time there was a problem created an atmosphere where risk need not be considered.
The regulators weren't looking on the one hand, and whenever the s&it hit the fan, on the other hand, then Greenie was there to hold the markets hand.

And some people think that this kind of system is a "free market" and should be left to its own devices to "self-correct."

If you had a kid and was left alone to his "own devices" and he burns down the family home..you don't attempt to build another one and consider during the re-building of having the kid wander about building site with a pack of matches and trust him to his own devices. The kid can not be trusted - nor can some adults - some people change and some are what they are - You would have to wait for the old guard to die off and install new young blood...If you can find replacements that have it together growing up under bad influence...sound like a hopeless situaltion....can we find good people to run things "Yes we can" ----where? :lol:

August1991 · February 21, 2009

I believe that one has run out of arguments when they whine about the sources rather than attack the substance of the sources arguments.

If you accuse me of only reading headlines, then I can accuse you of always citing the same echo chambers.

To be truthful though, if I could fault you msj, it would be because you view this crisis as an accountant or financial planner or policeman. Right or wrong. In your view, evil greedy bankers had free rein because foolish/conniving Bush neo-cons deregulated. To wit:

Sure, let's do the flush - get rid of the incompetent bankers, CEO's, shareholders and debt holders who allowed this type of crisis to emerge.

If life could only be so black hat/white hat. My response, after reflecting on life in the real world? Greedy bankers and self-serving politicians are not a new species on this planet. To blame greedy, unethical bankers is not helpful in understanding what happened. (Individual agents are usually assumed to be rational in most economic models.)

That's a lot of hedging there.

There is a lot of hedging, Dobbin. You're right. I went back and looked at Roubini's and Mankiew's ideas about nationalization and they really amount to public receivership. As in any bankruptcy, shareholders lose everything and debtholders become shareholders. But a bank in bankruptcy is different than Chrysler.

It looks like Citibank and Bank of America are going to go into "receivership". Maybe that will be the next buzz word, like "legacy loans".

I disagree. It was the cavalier attitude toward regulatory oversight that led to the problem.

See msj above.

Good of you to finally start realizing Greenspan's role in this.

I was trying to explain "moral hazard" to Dobbin. I'm not so certain that the Fed should twiddle with the knobs (because it leads to moral hazard) but I was impressed with Greenspan's knob twiddling ability.

Bernanke cannot twiddle knobs like Greenspan could. To choose a popular example, Central Banking is art and Bernanke is Salieri and Greenspan is Mozart.

Edited February 21, 2009 by August1991

msj · February 21, 2009

If you accuse me of only reading headlines, then I can accuse you of always citing the same echo chambers.

Sure, but I have put up more links backing up my arguments than probably everyone else on these same threads combined.

If you and others were to do as much then I wouldn't feel like it is such a waste of time....

To be truthful though, if I could fault you msj, it would be because you view this crisis as an accountant or financial planner or policeman. Right or wrong. In your view, evil greedy bankers had free rein because foolish/conniving Bush neo-cons deregulated. To wit:

How nice of you to cherry pick a quote. Surprise, surprise, surprise. :rolleyes:

If life could only be so black hat/white hat. My response, after reflecting on life in the real world? Greedy bankers and self-serving politicians are not a new species on this planet. To blame greedy, unethical bankers is not helpful in understanding what happened. (Individual agents are usually assumed to be rational in most economic models.)

To the extent that the shareholders, incompetent boards, managers, debt holders etc are responsible for this mess then they should pay the price.

Banks should either go bankrupt or be nationalized. As such, the boards, managers and shareholders should be wiped out. The debt holders should get a haircut.

This would be most beneficial for those banks that do have competent leadership.

In fact, if a white knight were to come into the market to buy a near-bankrupt bank then that white knight would do exactly what I have proposed above.

It is entirely reasonable to expect the government to take the same attitude when they directly put hundreds of billions into the system and indirectly guarantee trillions more.

If we just let all of these people get away with such incompetence (not to mention numerous cases of fraud that are currently under investigation by the FBI) then I suppose we can say things like: Murderers and rapists are not a new species on this planet and to blame them for what they have done is not helpful in understanding what they did since they are individual agents and are, therefore, assumed to be rational. :rolleyes:

I was trying to explain "moral hazard" to Dobbin. I'm not so certain that the Fed should twiddle with the knobs (because it leads to moral hazard) but I was impressed with Greenspan's knob twiddling ability.

Of course Greenspan looks good to you - because you are incapable of seeing how what he did was one of the many causes of this crisis.

As such, he left just in time to pass on his legacy to those who come after him.

msj · February 21, 2009

Looks like Barry Ritholtz, the man who caused Citi shares to tumble last week, is keeping track of those in support and against nationalization. [That bit about Citi is just a joke]

His list is here for those who want to follow the arguments for and against this.

August1991 · February 24, 2009

To the extent that the shareholders, incompetent boards, managers, debt holders etc are responsible for this mess then they should pay the price.
Banks should either go bankrupt or be nationalized. As such, the boards, managers and shareholders should be wiped out. The debt holders should get a haircut.

At this point, bankruptcy, nationalization, pre-privatization, receivership or trusteeship all amount to the same thing.

The problem is how to decide which banks to put in receivership and then how to do it for the big ones. This whole idea of "stress tests" sounds good on paper but in practice, it's a nightmare. And then, how do you put Citibank or Bank of America into receivership?

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.
While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.

WSJ

Yet, this is the dilemma that Obama now faces. His administration will soon be tagged as hesitant and changeling - unless it just sounds clueless:

Despite the huge sums the federal government is spending to aid banks and stimulate the economy, President Obama said on Monday that his administration will slash the federal budget deficit, in part by ending the “casual dishonesty” that has accompanied Washington budgets of late.

NYT

I have the impression that Obama is trying to put the train back on the rails (he wanted his quadrennial to be about other things, including entitlements) but it insists on going its own way.

Henry Paulson's "moral hazard" philosophy took a major hit when he let Lehman Bros. go under.

He organized the sale the sale of Bear Stearns at $2. In either case, it may now prove to have been the best long term policy.

Throwing money at these organizations is like jumping into the upper Niagara to save a corpse. They're going over. Should we go over with them? More pointedly, for anyone upstream, should we give them a false sense of hope? Maybe they should start swimming, fast.

I disagree. It was the cavalier attitude toward regulatory oversight that led to the problem.

This is a common meme on the left.

Oversight/regulation is not easy because it's hard to prevent speculative bubbles. When people want to believe, it's hard to stop them. We should at least be thankful that Americans no longer have panics. (A bubble is when people wrongly believe the value of their savings will make them rich. A panic is when people wrongly believe the value of their savings will disappear completely.)

The right's argument against regulation is not that the principle is bad, it's that regulation won't solve the problem. Markets are not perfect and when they fail, it's often because we have no other institution available to solve the problem.

Government regulation simply makes things worse. (In many ways Dobbin, that is the anti-Greenspan argument. If Greenspan had left alone and simply been a straightforward monetarist who didn't twist the knobs, as I put it, we would have avoided this mess.)

Edited February 24, 2009 by August1991

Oleg Bach · February 24, 2009

The banks will never be nationalized any more than the Federal reserve will ever be federal - label it as you will...those that hold the money are just shifting it - kind of putting it in protective custody --- you can't take that it belongs to the people it's a nationalized bank.... :rolleyes: