Former McCain Adviser Calls For Bank Nationalization

04/20/2009 05:12 am ET | Updated May 25, 2011

Via Matt Yglesias, it would seem that Douglas Holtz-Eakin, who advised John McCain on economic matters, has come out in favor of bank nationalization.

The right thing to do is to apply the principles of responsibility and competition, and the lessons of history to get this right. The most important lesson is that failed, insolvent banks cannot be permitted to continue to operate using taxpayers' subsidies. Letting these "zombies" walk the financial system was at the heart of the savings and loan crisis and the slow Japanese recovery from its financial crisis. These institutions should be taken over, their management and shareholders suffer the consequences of their failure, and the assets re-sold to private sector entities as fast as is feasible. That's good policy: discipline failure, promote real competition, and use assets effectively in the private sector. (Adam Posen is really smart on this topic. Read his testimony, here.)

Doing business that way eliminates "bailing out the banks" and "saving AIG" from the public discussion, and hopefully will make taxpayers more willing to open their wallets to solving the problem. Yes, it will be costly - but the cost is the price of not allowing the unwinding of individual institutions to cause a chain reaction of financial collapse. That is, the taxpayer money WILL flow through an AIG, for example, to those with which the failed institution has contracts. They may or may not be made whole, but they will not be stiffed entirely. The public will have to understand that this is the appropriate role for the federal government: preventing widespread collateral damage.

This sort of plan seems to have widespread support across the ideological spectrum of the deep thinky/op-ed set. Whether it does in Congress or not is another question. Of course, I still recall that Holtz-Eakin was the man who told reporters that the BlackBerry was a miracle John McCain helped create and who presumably did not disabuse McCain of his plan to exacerbate the economic downturn by freezing government spending, so it's tough to know if his support here speaks well or ill for bank nationalization.

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