Many leading economists are increasingly sounding like David Sirota and other leftists: It's time to nationalize the banks, at least temporarily, or we won't have a chance at economic recovery. But the Obama administration, the GOP, influential CNBC anchors and Wall Street leaders are resisting temporary nationalization -- actually it's more like a receivership -- because it smacks to them of government bureaucrats or wooly-headed liberals running the banks, while giving the government too much power over the financial institutions these bankers, CEOs and brokers in fact wrecked.
You can see some of the country's smartest economists, including Nouriel Roubini, Moody's Mark Zandi and Columbia University's Fred Mishkin discuss matter-of- factly what's needed to make Obama's economic recovery and banking bailout plans work on a recent Charlie Rose show here. They essentially all endorse far bolder steps than Obama and Geithner have proposed so far to jump-start the financial system that's slowing down the economy because of so much frozen lending. Progressive journalists also join this critique. As summarized by the Media Consortium:
Robert Kuttner offers a strong analysis of Geithner's strategy to salvage the banking industry in The American Prospect, noting that Geithner is explicitly avoiding the simplest and cheapest solution in favor of propping up the current Wall Street regime. The current plan is designed to support a financial architecture that has proven completely ineffective in maintaining the nation's basic economic functions.
Geithner has thus far refused to nationalize the big, insolvent U.S. banks and give taxpayers ownership authority in exchange for their financial assistance. Instead, the new Treasury Secretary's proposal devotes $1 trillion to writing insurance policies on bad mortgage assets to encourage private companies to buy those assets from troubled financial firms. This complicated strategy is designed to reduce the amount of money the government will have to pay to save the financial sector by bringing private enterprise into the bailout. However, the sheer convolutedness of the plan makes it much less efficient than temporary nationalization would be.
Paul Krugman reports how this too little, too late approach could help turn our banking system into the zombie banks that stalled Japan's economy:
Ben Bernanke's testimony over the past two days gives us our best clue yet about where the administration and the Fed are going with bank rescue. And the answer seems to be ... nowhere.
Simon Johnson and James Kwak read it the same way I do:
This is another sign of the serious brainpower that has been expended on finding ways to avoid or minimise government ownership of banks, and to avoid the slightest possibility of offending shareholders - shareholders whose shares have positive value primarily because of the expectation of a further government bail-out.
And The Economist's Free Exchange puts it bluntly:
At this stage, I joked, I'd be just as happy with them just saying, "We have a strategy, we will continue to inject capital to prop up zombie banks indefinitely. That's pretty much the whole plan and we're counting on it bringing the financial sector back to life someday, somehow". Is it just me or is that pretty much what Ben Bernanke said yesterday?
No, it's not just you.
I'd add a political-economy point. Here's Noam Scheiber, in the new TNR economics blog:
Yesterday afternoon I spoke to a senior Democratic aide in the Senate who repeatedly emphasized that, the way things stand now, it would be almost impossible to get another cent for the banks. Congress has "bailout fatigue," the aide said.
Brad DeLong, Nouriel Roubini and other economists explain that the temporary receivership approach isn't a Soviet-style bureaucracy, but uses government oversight to ensure that banks are strengthened or those that are insolvent have their assets sold off, as Sweden did. As Roubini and Matthew Richardson outlined the basic approach in a seminal Washington Post article, "Nationalize the Banks! We're All Swedes Now":
First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.
Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.
Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.
The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.
Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.
The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.
Nationalizing banks is not without precedent. In 1992, the Swedish government took over its insolvent banks, cleaned them up and reprivatized them. Obviously, the Swedish system was much smaller than the U.S. system. Moreover, some of the current U.S. financial institutions are significantly larger and more complex, making analysis difficult. And today's global capital markets make gaming the system easier than in 1992. But we believe that, if applied correctly, the Swedish solution will work here.
Of course, "nationalizing" banks is a dirty word in the American political context, and progressives seeking that goal would be well advised to offer different phrases and messaging to be able to sell it to the public, the reluctant Obama administration and Congress.
The Nation magazine rightly concludes, "Temporary nationalization of banks is, indeed, the best way for the United States to avoid ending up with a 'lost decade' like Japan in the 1990s. It gets the toxic waste out of the system, and not by robbing the public, making possible the resumption of economic growth. But without stringent safeguards on assets sales and vigorous anti-trust regulations, new rounds of financial pathology will become inevitable."
True enough, but how will this bolder approach become reality? Last week, on the Web radio show I co-host, Bernie Horn, a senior fellow at the Campaign for America's Future and Brad DeLong, the noted Berkeley economist (who called in about 50 minutes into the show), explained how progressives can organize to build support for the best parts of Obama's economic plans and make them more effective -- and DeLong carefully explained how banking nationalization can work in America.
If mainstream economists and progressives can't help push the Obama administration into taking firmer action to salvage our banking system, Democrats could reap a whirlwind of populist revolt fueled by GOP know-nothingism and genuine grievances. Michael Lind in The Daily Beast wrote a thoughtful, if scary, article pointing out, "If the Obama administration doesn't start to deal with the populist wave headed for Washington, Republicans will tap a reservoir of resentment that could destroy his presidency." Written before Obama's soaring and populist-oriented speech Tuesday night, it's still worth considering because the actions of his economic team so far don't match the rhetoric Obama has used to reflect the anger Americans feel towards the rip-off artists, greedheads and con-men on Wall Street. Lind observed:
First they came for the bankers. Then they came for the CEOs. Then they came for the liberals. That might be the epitaph of the Democratic Party, if Democrats cannot learn to surf the tsunami of populism created by the economic earthquake...
As more Americans lose their jobs and their homes, as more businesses crater and banks topple, popular anger is rising like a wall of water over a suddenly quiet beachfront resort. You'd think that the Democrats in Washington would be aware of the danger. After all, the massive expansion of Great Society spending in the 1960s, followed by the stagflation of the 1970s, allowed the marginal conservative movement to tap populist anger and dominate American politics for a generation. Substitute stimulus for Great Society and years of possible "stag-deflation" for stagflation, and you have a scenario in which the Obama's overwhelming majority could collapse as quickly as LBJ's.
To date, however, the Obama administration has seemed more concerned with reassuring Wall Street that it will be protected against Main Street hotheads than in disciplining Wall Street on behalf of Main Street Americans who have lost jobs, homes, and savings. First Obama appointed an economic team dominated by Robert Rubin proteges, like Timothy Geithner, who were considered safe by the Street. Then Geithner put forth a plan which many economists warn might force the public to pay too much for toxic assets held by the banks...
Above all, Obama and the Democratic Congress must refute the idea being spread by Republicans that the trillions of dollars that the federal government will spend are really disguised subsidies for particular Democratic constituencies, from environmentalists to minorities. By stigmatizing Great Society programs as special-interest giveaways, the Republicans built an alliance of conservatives and populists that marginalized liberalism and governed America for a generation. Don't think that they can't do it again.
Obama's speech offered hope about the economy, but in the real world of economics and politics, unless the administration can actually get our financial system working with more than gauzy talk about "public-private partnerships" our chances for recovery look grim.
We didn't listen to Dr. Doom, Nouriel Roubini, the first time around when he accurately predicted the collapse of the housing bubble and a global recession, so maybe we should pay attention now:
Dr. Doom: Nationalizing Banks is 'Market Friendly'
Nationalizing insolvent US banks is the best solution to avoid a Japan-like scenario in which 'zombie' financial institutions would eat up public resources while the US economy would teeter on the brink of depression, Nouriel Roubini, economics professor NYU and chairman at RGE Monitor told CNBC Tuesday.
Bank shares have fallen on news of abysmal losses and on fears that governments across the world would step in and wipe shareholders out, dragging global stock markets down, but temporary takeover by the state of the sick institutions will insure the survival of the system, Roubini said. "The market friendly solution is temporary nationalization," Roubini told "Worldwide Exchange".
"Doing something surgical and radical actually may improve the market sentiment," he said. "If we don't do it, we risk ending up like Japan, that had zombie banks for a decade," he added.
Furious banking consolidation that took place in the years preceding the crisis has made matters worse, as it had created banks that were too big to fail but also too big to save, according to Roubini....
"If you don't nationalize them on a temporary basis the fiscal commitments will be bigger," Roubini said. "The alternative is actually a dangerous debt spiral. We risk ending up in a near depression for the US and the global economy if we don't take this radical action as necessary."
Is the Obama administration listening to such sensible voices? Let's hope so -- or it could spell trouble for the economy and, hard as it is to believe now, for Democrats as well.