Nationalization Is A Bridge Over Troubled Waters

As many of my HuffPo friends know, I don't have a socialist worldview and am a believer in free, functional, and fair markets.

But the last few years have shown us how - and how spectacularly - a poorly-operated market can fail. And contrary to the religious tenets of a pure free marketeer, it has failed in a way that has punished everyone, not merely those who are supposed to get punished for making bad bets.

What has happened over recent years in the banking sector has enabled (directly or indirectly) criminal theft from the American taxpayer. The so-called "profits" of the past several years - which enabled management and shareholders to extract hundreds of billions of dollars - were, in reality, money shifted from the future (us, now) to the present (them, then) via complex financial instruments.

Let's be honest: we are truly dealing with zombie banks. These banks are dead. But we refuse to admit it, and we're handling it in a way that is politically palatable yet much worse than nationalization. Think about this: if the US taxpayer has already injected an amount of capital into a bank that exceeds its market capitalization, and the taxpayer owns less than 100% of that institution, then they have made a very bad deal. Net/net: we continue to be stolen from; we're chumps.

Photo: Steve Rhodes

What's unique about banking - and really, money and currency itself - is that it has the strange characteristics of being at once a public utility and private property. Thus, embedded in (and thus endangered by) a private sector are profound public interests. We all utilize some sort of mutually-agreed-upon currency. Thus, whether we're in the banking sector or not, we are all impacted when that currency (or its trading and transport system) has a serious illness. And at the moment, the private interests of the few continue to be lubricated while the public utility component is in cardiac arrest.

On Bill Moyers' program the other day, economist Robert Johnson described our current methodology as the "IV drip" method of capitalization. Yet here we sit, essentially ignoring the structural problems of the sector. Johnson is absolutely right. This is unsustainable, and the only question is when we accept the inevitable (and how much of our children's money we will pour down the sewer before we accept it.)

These institutions - no need to mention them herein because you all know who they are - are unquestionably insolvent. Many recipients of Treasury aid are now worth considerably less than the total amount of government capital that has been injected into them. And they will continue to consume any further money injected into them until we stop the madness.

There are really only two ways to do that. One is to let the private market mentality dominate and allow a painful and spectacular death for all of these institutions (and the serious punishment the US dollar will take as a result). This would also mean that our taxpayer injections are essentially lost. This also probably means a dramatic global financial unwinding unlike anything we have ever seen before (and unlike anything that most people will still talk about in pleasant company.) It means a global recession becomes something worse.

The second option is far more palatable: government receivership. The banks could be brought into an operational state exactly like a failed bank does under the FDIC. Frankly, if these were small banks, it would have happened a long time ago. This is not an "unjust taking"; you cannot have it both ways. Either survive in the private market you claim to worship, or accept the consequences of your failures. There are serious public interests at stake here - and, judging from stock prices, the market has essentially accepted this as a likelihood anyway.

Under a receivership process, we can quickly expose the rotten assets to the light of day (e.g. actual market pricing.) We can tell the truth about those that are worthless (there will be lots). We can also segment off the healthy assets and offer them to private investors as new, clean banks. (Insert "Good Bank-Keeping Seal Of Approval" here.)

I find it a nauseating example of American stupidity that we have a knee-jerk reaction to "nationalization", yet we willingly slurp up the current solution - which, while politically saleable, is far worse than temporary nationalization. Right now we're accepting the worst of both worlds.

We need to see nationalization for what it is: a bridge over troubled waters. This would not be government leaping into the retail banking business. This is government - i.e. We, The People - restoring health to what is unquestionably a dysfunctional, failed public utility. If the electricity was out 9 hours a day in every US city, I doubt we'd be quite so loath to step in and do something.

Thus, The People must step in immediately and seize these failed banks, with a goal of re-privatizing the healthy components therein, and disposing of the detritus with all speed. This requires us to give due deference to the public utility side of banking, and it's the absolute best way to get us moving toward a restored, healthy, trustworthy banking sector.

Until then, we're just going to keep bleeding.

Comments

[Henry]

A little American history for your benefit. It was 1983, the Gipper was President, Continental Illinois failed. Ronald Reagan bailed the bank out, he did not let it fail. He nationalized it, he socialized it, he exempted it from the rules of market discipline. Why would such a conservative permit such a thing? Bill Isaacs, his chief of the FDIC stated that if Continental were permitted to fail, there would be an immediate wave of 70 separte retail bank failures in the region. The FDIC did not have the personnel or the assets to handle this magnitude. We've been here before, we're back again.
If the big banks and AIG are siezed in receivership fashion, you have the former of your scenarios while day dreaming of the latter. Too big to fail is the albatross that hangs around the neck of republican ideology. Jimmy Carter bailed New York City and Chrysler at a profit to the taxpayer. Can't you just imagine New York City in a receivership?

[TIME]

Free and fair trade, by all means. Unfortunately we do not have free and fair trade. How do we compete with workers of the World, who make less than 80% of what our workers make? We will have to learn to live a much lower standard of living, or raise the wages and benefits of the workers of the World.

What's been going on here (especially with the financial and auto companies) is bad capitalism. We will not survive if the business profile of the future, is the same that has gotten us to this point. New management practices are needed. If management can not change, then regulation will be necessary. It has been management by greed, not capitalism.

Every so often (it has happened before) socialism has to step in to save capitalism.

I believe in the traditional capitalistic model. Cold, hard, but American. If their bad business practices have brought them to the point of bankruptcy, then let them go bankrupt. Another group will step in to serve the Americans needs. It is not unknown for government to give money to start up companies.

If necessary, the government could buy up the bad debt, and let banks get back to making loans. That would be less than trying to buy out these financial institutions who's decisions were so bad. Their decisions were bad because they were after as much money (greed) as possible, not good capitalistic practices that generate profit.

[jerrypl]

I am with you, it is time to nationalize the banks and let the FDIC restructure the assets and unfold the toxic debt. We need more socialization in this country, such as single payer health care, and a bottom up economic stimulus. Not a top down stimulus revitalization program we are watching occur now with Geithner. A bottom up, manufacturing stimulus is the only chance to pull off a recovery. It is impossible for the Fed to bring about a recovery. Credit cannot be thawed. It is not like a frozen pipe. Credit is a contract between a lender and a borrower. Such a relationship is done. The potential borrower is no longer able to or willing to borrow now. Wake up Geithner.

http://eye-on-washington.blogspot.com

[Henry]

"Under a receivership process, we can quickly expose the rotten assets to the light of day (e.g. actual market pricing.) "

I think you've been watching too much Walt Disney! You should read a little about the debate that still rages re "mark to market" pricing of assets and try and catch a grip of the complication that surrounds all of this. There is no market for this stuff, it can be sold only at robbery discounts and guess who the purchasers will be? (you cannot be so naive) It was the same way with the RTC of the prior Bushwa days of speculation.