03/05/2009 04:56 pm ET | Updated May 25, 2011

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.

Bank of America Middle Finger

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.