Reports from the Economic Front

a blog by Marty Hart-Landsberg

Time to Talk about Nationalization

Even the Federal Reserve Board [Fed] is beginning to acknowledge that we are in a serious economic mess.  The Nobel Prize winning economist Paul Krugman quoted the following statement found in a summary of the minutes of a recent Fed meeting:

 

“All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”

 

Translation: we are not only far from seeing the end of the recession, we are also not confident that there will be any meaningful recovery after it finally ends.

 

This brings us to the financial system and the need to nationalize several of the big money center banks.  Most of our top economic policy makers do not believe in nationalization—they believe that only private interests pursuing private profits can produce desirable outcomes.   For example:

 

  • Timothy Geithner, Treasury Secretary: “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

 

  • The Washington Post reports that Mr. Geithner and Lawrence Summers (President Obama’s top economic adviser) “think governments make poor bank managers.”

 

And they say these things with a straight face after our privately run, profit making banks have basically steered our financial system into ruin.  Most analysts believe, and I see no reason to disagree, that several of our major money center banks–like Citi Bank and Bank of America–are now technically bankrupt.  They own various assets tied to the housing bubble that have lost most of their value.  And they have made other loans that are no longer yielding returns because of the recession.  As a result, the market value of their assets is now below the dollar value of their liabilities.

 

Unwilling to declare these banks bankrupt, the government has been pouring hundreds of billions of dollars into them—but with little to show for it.  We bought stock without voting rights and we bought some of their toxic assets, but the banks have used the money to pay out dividends, bonuses, and even buy other financial institutions.

 

If we keep this up, their death spiral will drag us all down.  So—there is only one real answer—nationalize the banks that are technically bankrupt.  If we take them over we can actually figure out how bad the mess is, and develop a plan to deal with it.  We can ensure that the new managers we put in are paid a reasonable rather than exorbitant salary, and most importantly we can direct the banks to start making the loans that are needed to support the stimulus plan and get the economy going.

 

This is no radical call—actually there is a growing chorus for nationalization.  As the New York Times recently editorialized:

 

Rescue measures have so far prevented a system-wide meltdown, but they have not reversed the downward slide or revived bank lending. . . . Done right, a takeover would be a once-and-for-all fix. The government would examine the banks’ holdings to get a realistic assessment of the toxic assets that are crippling the banks — and how much capital each bank needs, not only to survive but to begin lending again.  Institutions that are healthy enough to raise the needed capital from private investors would remain in shareholders’ hands. Those that are too weak would be taken over by the government and recapitalized with taxpayer money. . . . Taking over big failed banks will be very difficult politically. But technically it could be easier than many of the elaborate rescues that have been tried and proposed.

 

The Times is actually coming a bit late to the position–At the end of this post you will find links to a number of articles by economists who have been calling for nationalization.

 

But, now we get to a key point—the Times and most of the other economists want the government to right the banking ship and then put the newly recapitalized banks up for sale to the private sector.  And I think that is a mistake.

 

Here is my reasoning: We have an economy that is in need of restructuring.  One important way is to control where money goes and at what price.  In other words, we have good evidence that a banking system organized to maximize profits is not a system that automatically directs resources to the activities that we want to promote.  Now, imagine developing a government strategy that seeks to rebuild our economy along new more productive lines—for example giving priority to an expanded health care complex, mass transit system, sustainable and localized system of food production, alternative energy, green technologies, and companies that pay a living wage or respect labor and environmental rights.

 

And now imagine a credit system that would be responsive to those priorities.  Even imagine banks that offer credit cards with an interest rate ceiling of 8-10% rather than 20-30%.—think how many new depositors these banks would get  You get the picture.

 

There are lots of banks that do make reasonable returns doing reasonable business.  Well, why shouldn’t we own a few of the big ones, especially the ones that have proven that they cannot manage themselves—we could set best practices (like with credit card rates) and use the reasonable returns to support desirable social programs—this would have the added benefit of allowing us to reduce the budget deficit and/or taxes.  Owning businesses that generate reasonable profits doing the public’s business makes a lot of sense—at least to me.

 

Nouriel Roubini: Nationalize Insolvent Banks 2/12/2009

Dean Baker: The TARP Dog and Pony Show 2/12/2009

Naomi Klein: We’ve Got to Make Obama Do It! 2/6/2009

Nationalized Banks Are ‘Only Answer,’ Economist Stiglitz Says 2/6/2009

Jane Hamsher: Obama Financial Team to Taxpayers: You’ll Get Nothing, and Like It 2/3/2009

Paul Krugman: Bailouts for Bunglers 2/2/2009

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