Time to Stop the Nationalization Rhetoric, and Let the System Work

This week, the Federal Deposit Insurance Corporation took over Silver Falls Bank in Silverton, Oregon. Silver Falls Bank was the 14th bank taken over by the FDIC this year. This compares with 25 banks that failed in 2008 and 3 in 2007. Bank failure is not unheard of. And up until a week or so ago, the term "nationalization" was not invoked.

Since its creation in 1933, the role of the FDIC has been to prevent runs on banks by insuring bank deposits and to oversee the orderly disposition of failed banks. For the better part of a century, it has done its job quietly and effectively. And today, we would all be well served to let the FDIC and its capable leader, Sheila Bair, do their job.

From the beginning of the current financial crisis, one of the problems has been the failure of the leading agents of the government, embodied by Hank Paulson and Ben Bernanke, to establish clear rules and follow them. Instead, we have plodded along, from crisis point to crisis point. From Bear Stearns to Fannie Mae to Merrill Lynch to Lehman Brothers to AIG to Washington Mutual, each collapse engendered a unique response by the Treasury and the Federal Reserve.

In a similar manner, the focus of the $700 billion Toxic Asset Relief Program -- the federal bailout -- to address the insolvency of the nation's largest banks has veered from the purchase of toxic assets to injections of capital to guaranteeing of assets. Now once again, toxic asset purchases are back in vogue as the strategy of choice, this time under the "good bank, bad bank rubric."

This week, the stock market broke through its technical support levels, and now appears headed toward 6,000 as its next support level. Some observers have suggested that the decline reflected the market response to looming plans for the "nationalization" of the banking system and one more step down the road to socialism, as trumpeted on the cover of Newsweek.

But market decline was not a result of the fear of nationalization, and nationalization would not mark the next milestone on the road to socialism. Quite the contrary. Investors are running away from banks -- good banks and bad banks alike -- precisely because the federal efforts to date have obscured the true financial condition of the banks. Faced with uncertainty and poor information, investors will always pull back and wait for the fog to clear.

The takeover of insolvent banks by the FDIC is the way the process is supposed to work, and the way it has always been allowed to work--up until now. For all of the debates over the "Swedish Model" -- where banks were taken over, balance sheets reconfigured, and then spun back out to private ownership -- the way they did it in Sweden is not actually all that different from the way they do it at the FDIC, when the FDIC is allowed to do its job. Insolvent banks are seized. Assets are sold off and the depositors are paid or, if possible, the balance sheet is cleaned up and the bank is sold off to a new owner.

The problem today is that a small number of our insolvent banks, notably Citi, are very big and very visible. But the problems they face are the problems that the FDIC was created to fix. This is not nationalization, it is essentially a debtor-in-possession bankruptcy process whereby the FDIC serves as the receiver.

If left to do its job, the FDIC would do what the banks resolutely refuse to do: sell their bad assets, accept the price of their business decisions, and move on. The banks refuse to do it because it would force them to face up to what the markets, and increasingly outraged taxpayers, have known for a while: They are insolvent.

For years, America has told other countries how to deal with financial crises: Cut your losses. Clean up your balance sheets. Get on with it.

This week, the stock market said the same thing.

On a side note, the Ford Motor Company -- the one that is not taking federal money -- has seen its market share rise steadily for the past four months. This is the way markets are supposed to work. Saving one company or another -- or one bank or another -- is not an inherent public good, however politically compelling. And pumping public money into one company serves to dramatically disadvantage their competitors.

One of the biggest mistakes that Hank Paulson made was demanding that banks take TARP money, even if they didn't want to -- or need to- -i n order to remove the stigma from those who did. Somehow, this was supposed to be a way of maintaining confidence in the system. But instead of protecting the bad banks, by letting them hide among the good, it has achieved the opposite. That is why investors have turned their back and are walking away.

The banking industry and the markets would be better served if the politicians and the pundits quieted their politically loaded hubris about nationalization, and if the Treasury and the Fed let the process work, as it has been designed to work. Forget about creating good banks and bad banks. Let insolvent banks take their medicine. Management, shareholders and bondholders will pay a steep price for business failure. And let the banks that are healthy take market share from those that are not.

It is time to let the process work. Punish failure. Reward success. This is not nationalization, it is the way the system is designed to work. Time to take the banks off the dole, and let Sheila Bair do her job.

Comments

[adoseofsanity]

GREAT ARTICLE! One of the most 'SANE' articles I have ever read at the Huffington Post.

The fundamental problem is that very few folks understand capitalism and the market economy any more. FAILURE is a part of that, a critical part. And the prevention of it has profound negative effects...­........wh­ich in the LONG term are much worse than the SHORT term gains seen through government intervention.

[RonMar]

I agree. Since nationalization is being talked these points are important too:
1. Bernanke told Congress on Tuesday … regulators aren't planning to nationalize banks. The news … lifted the Dow Jones industrial average and Standard & Poor's 500 index off their lowest levels since 1997.
2. Nationalization is an often-heard buzzword of the Obama administration and Liberal Democrat-dominated Congress: nationalized healthcare, banks, “media” – California AG Jerry Brown, last week. Nationalization, in one way or another, has been going on for some time. Here are some things effected or for future nationalization if any more occurs, preferably by legislative action or better yet referendum of the people: gun control, marriage, sales taxes, mandatory discussion of racial issues (see Eric Holder’s “nation of cowards” remarks), national photo, finger or thumb print ID cards, birth certificates; all of these - police protection, fire departments, first responders, energy, oil, environmental policies, state and local parks, governments, infrastructure, technology development and research, employment, industries, small businesses, state National Guard units, assistance to needy people, religion, climate change initiatives, the Internet, euthanasia and abortion. Wait a minute – we have done the last one already with Roe v. Wade and made significant “progress” on many of the others?
Just think of the growth in Federal government, cost savings or tremendous ballooning of costs we could have, and settlement finally of an issue over which the 1861-1865 War Between the States was fought. And we might be able actually to see Obama’s birth certificate.

[MetryJen]

Great article, and I wish the powers that be would listen to this. I was *really* hoping for Ms. Bair to head Treasury, but it didn't happen - now I just wish they would let her do her job.

[markjuliansmith]

We all know the system has failed. We can do something about it in a way which improves our situation on a continual basis without the supposed need to go again and again through the cycle of Greed and Fear and have good ideas buried along side our fellow citizens.

How do we finally achieve actual democracy?
1. Split the derivation of policy into three distinct parts policy creation, administration, and evaluation.

2. Move the policy creation out of the hands of public servants and parliament­arians/pre­sidents/co­ngress into the community by utilizing modern decision making processes which include rather than exclude.

3. Establish a moral basis for the operation of corporations for the benefit of the communities within which they exist rather than their own self-interest.

4. Establish public knowledge hubs with current data which can be combined across quite disparate policy areas so the minds and voices, of more than the very restricted few, can have a real say as to their futures. No piece of information is an island nor should it holed up in someone’s pocket for their aggrandizement.

5. Create from the bottom up society whose culture based on the realization of others independence first rather than self-interest

6. As the Parliament/Congress can decide the nature of how it governs - vote for independents in elections who support the points above.

7. Turn parliament­s/congress into historical museums as a warning to future generations.

[PigLipstick]

"vote for independents in elections"

I did, even though I knew it was a waste of time. A two-party duopoly that has locked out all other voices. Independents from the Left and the Right tell the same stories of being blocked at the city, state, and national level while the Democrats and Republicans are allowed to take the high speed lane.

I find it ironic that the lawyers have a virtual lock on our system, 1 out of ever 3 members of Congress hold a law degree, and yet the system is totally corrupted with torrents of money choking the life out of our so-called Democracy. I doubt seriously that any of the millionaires who currently occupy a seat in our government have the slightest idea, or really care, what average Americans are confronted with every day. The Greeks, who first established the concept of a Democracy, were quick to warn future generations against ceding control of their government to a wealthy Oligarchy. Arianna wrote about this bunch in a former book of hers, "Pigs at the Trough".

[MetryJen]

Keep in mind that the Congress makes laws, therefore it's probably a good idea to have someone that knows the law in the seat - ya know, a lawyer. I used to think that didn't matter, either, and then we got our MBA president and we all saw how well that turned out.

[markjuliansmith]

II do not know if you have noticed this was never an economic failure, it is a catastrophic political system failure. Again & Again this system has proved to be a Greed and Fear machine only.

The systems basis, the notion of sovereignty, the feudal based power and intellectual snobbery which goes with it, where good ideas are buried along with our fellow citizens, around the world, economically and more often than not physically has failed again. Wake up!!

Governments around this world have suffered catastrophic failures of their data, information, knowledge and policy making mechanisms. One is the economic collapse. I am sure you can identify others particular to your own countries.

In these cases the leaders and the systems they represent claim they could do nothing to prevent or foresee these catastrophic failures. Whichis true only to the extent these leaders and the systems they represent are and continue to prove incapable of learning from the past.

The key to the policy failures and our ability as citizens to do anything about the frame work within which we and this policy creation framework exists is the question of secrecy and sovereignty.

Secrecy of information, under the guise of privacy, is power and sovereignty of the government and the executive is absolute power. In other words despite whatever is stated these fellow citizens and the system within which they reside are completely unaccountable.

[grateful4thedead]

it is and has been on the us treasury site since geithner's speech of approx. feb 10. there is a fairly detailed fact sheet. specifically to this issue, please review the CAP provisions.

[afterallthat]

Banking institutions are more dangerous to our liberties ­than stand­ing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. 

Thomas Jefferson -1802

[cwcarman]

Good article, well thought out, based in fact. This guy must be a progressive

[alumtrix]

sounds like a conservative to me. And why do all you libs have to state in every other post "based in fact" concerning an article you like. It was a good article. Now if we could convince America to take the same approach with the automotive industry. Let the workers and management get together and negotiate themselves back into profitability and having a job TODAY instead of worrying about getting 6 weeks of paid vacation and having healthcare when they're 85 years old.

[DestinationsUnknown]

Please people! Use your head or get it out of the sand!
Citi is at 2 bucks a share! What is that sdtock really worht without the TARP $$$$ it already recieved.

Anyway, ever notice all the FRAUD CITI and JPMORGAN participate in!

[jackwaddington]

Nationalization is what we should do with many industries BUT, real nationalization has never been tried. What goes for nationalization is that the government puts in another CEO to run the business which means we keep going down the same rat hole and expecting a different result. REAL nationalization is to let the workers of that industry run it (which in the end is inevitable). As we now see, they couldn't do a worse job and it is the workers only (in all industries) that truly understand the business.

[fatnugly]

Workers of the world unite

[adoseofsanity]

WOW.......COMMUNISM LIVES.........

[yesman]

You are so right. I used to think that big banks and corporation must have people in charge who were at least somewhat intelligent and competent. Every day, however, I see more and more evidence that those in charge of businesses, corporations and banks are in fact total idiots. They don't know what in the hell they are doing and are utterly incompetent. The workers are the ones who know how to run the businesses in which they work.

[bighat]

Bank workers are mostly filled with bankers. They might make better decisions than the precedessors. Or are you speaking of admin aides and tellers to run the banks.

[websmith]

Everything that this government is doing right now will only make matters worse. If we would only do what we are supposed to be doing, things will get better really fast.

http://ewebsmith.com/finance/betterstimulus.html

[truthglow]

RIGHT!!! Like letting the Republicans run things? No thanks. If my money is needed to bail out these idiots, then we must nationalize these institutions and get rid of the present boards and people who have run them into the ground! We will have a stake in their ownership and we will have our own rulers!!!!!!

[bighat]

Sounds like a plan. Although I have not heard of any senior management or board member being replaced. Is Bush still running things?

[Grit]

Government is not the problem. Its the greedy old rich men in government enabling themselves and the greedy old rich men on wall street and in the ivory towers overseeing the financial companies. Listening to wall st on anything is silly. It is controlled by two emotions, greed and fear. It is nothing more than high stakes legalized gambling. Especially the last few years. Want to find out how bad things are? Why not ask the citizens down at ground zero. Want to find out what to do? Why not ask them what they need help with. As far as nationalizing the banks to the average person that would make no difference at all. Till they find out that the government has about 2% of the FDIC deposits covered. If a bank is bankrupt and we have to give it large sums of money to keep it from failing totally I would say we have already paid the price of Nationalizing it. We have just left the people that caused it to fail in place.

[truthglow]

Some of those "greedy men" are young, but they are "greedy" just the same! As an "average person, I say "NATIONALIZE THEM," if you have to use my money to bail them out!!!

[bighat]

Bernanke and the the dem chairmen of appropriations are writing you now to see if you could send them a cashier's check to get started. Waiting for you to file your taxes will take too long. time is of the essence

[maxgen]

I don't put the major blame on the greedy CEOs of banks. Our forefathers knew that greed and chicanery could be in the hearts of anybody, so set up a system which limited the amount of damage which could be done. Thus we have the limitations imposed by the separation of powers and the bill of rights.

So our failure was in allowing Bush and crowd (mostly) to eliminate the limits by deregulation of the banking sector, which means the fault IS the government, it created the problem when it set the rules allowing greed to run riot.

A major lesson we need to learn in most areas is that the government sets the rules and we must live by them. In the present setup, the rules are usually set to benefit those who provide the biggest payoff to the wealthy, who pay off the politicians - often by setting rules which the allow legalized bribery by campaign contributions. speaking fees, etc.

[loganhunter]

So our failure was in allowing Bush and crowd (mostly) to eliminate the limits by deregulation of the banking sector, which means the fault IS the government, it created the problem when it set the rules allowing greed to run riot.

So you are saying that the CEOs who have run their companies underground are not at fault and not responsible and should not be held accountable because they are people and people will be greedy?

you'd have to be a banker to think like that!

[bighat]

the govt wrote the tax code which no one can understand. Regulations or not the govt is not at fault. There are many people in the world that take these rules and make them work form (the greedy as you call them) these people and their lawyers will always outsmart govt because the govt does not write rules in easy to understand rules. As a result the rich use high powered lawyers for their own intreapation of the law and the AG office cannot fight them because these high powered lawyers will out lawyer them at every point.

blaming Bush may make you feel better but in the end it changes nothing

[bighat]

Grit, I love your statemen. Govt is not the problem. It is the greedly old rich men in govt. maybe you should inform President Obama just who in govt is trustworthy and who is the greedy old rich men. Then Conyers can hold hearings.

[68Namvet]

Most of you do not understand the basic tenents of banking - succinctly summed up in Bankers Magazine, 1924:
"Capital must protect itself in every possible manner by combination and legislation. Debts must be collected, bonds and mortgages must be foreclosed as rapidly as possible. When, through a process of law, the common people lose their homes they will become more docile and more easily governed through the influence of the strong arm of government, applied by a central power of wealth under control of leading financiers. This truth is well known among our principal men now engaged in forming an imperialism of Capital to govern the world. By dividing the voters through the political party system, we can get them to expend their energies in fighting over questions of no importance. Thus by discreet action we can secure for ourselves what has been so well planned and so successfully accomplished." USA Banker's Magazine, August 25 1924

Or the difference between "liberal", "conservative", "democrat", "republican" or whatever:

“Allow me to control the issue and the nation’s money and I care not who makes its laws!” — Amshell Rothschild

Or that the Fed is a private corporation responsible for making money out of thin air:

Banks that hold the controlling stock in the Federal Reserve Corporation:
Rothschild Banks , Lazard Brothers Bank , Israel Moses Sieff , Warburg Bank, Kuhn Loeb Bank
Chase Manhattan Bank, Goldman Sachs Bank

Face it guys - WE ARE NOT PLAYERS!

[truthglow]

But we know what greedy means, and who the greedy are!!! NATIONALIZE THEM!!!

[bighat]

Personally, I would fire all the senior management and the money of the board of directors (they stake their own finances in order to be on the board) But nationalizing the banks and let Congress be in charge. Just what organization does congress run well and is cost effective?

[lostinthefog1949]

It all seems to boil down to money and power. Those who whine the most about the alleged nationalization of the banks appear to the same people who have benefited in the past by "working the system". Look at what lack of regulation and oversight has brought us to. Does anyone really believe that the system, as it was, really worked to the benefit of the ordinary citizen. Corporate greed, short term thinking and arrogance has brought this country to the brink. Investing is like placing your bet on a horse race. The difference is that you better protected at the track AND you know it's a horse race.

[bighat]

Many of us have fogotten and I think some did not know that Wall Street is a form of legalized gambling. Stocks have flousrished since 1980.

There was a time when Wall Street sneezed the rest of the world caught cold. Now it is a serious and deadly strain of the flu. What the U.S. does has ramications around the world.

Instead of leetting the beast die we are giving anibiotics hoping for life. We hope for life because these banks employ many thousands of people and have everthing from 401ks to teacher's funds invested in it.

Remember Humpt Dumpty and all the kings horses and all the kings men. Let me tell you that there is no one in congress and certainly not collectively have the financial knowlege to save these ailing giants. And worse we are not talking about just these 2 banks. Who in their right mind would invest in any bank right now. As far as that goes just how many people are going to open a checking account are a CD in these 2 banks.

These banks must fail and other pickup the slack.And they would quickly except for one thing. The govt is giving out money. And every sign of inflation is waving. our best and brightest instead of looking for a better mouse trap are looking at govt handouts.

The U.S. and world will not recover as long as we keep putting bandages on these wounds

[sloLes]

Excellent article and some very good comments by many. But a few additional points need to be made.
The people responsible for this crisis got rewarded along the way with commissions for making the bad loans; profits from building the new houses for people, who couldn't afford them; and by selling their personal share of the financial institutions to the public, when all these institutions went public with stock of their own. And of course, that's how Paulson amassed half a billion of his own assets.
I have to agree with Mr. Paul. WE need to recognize that banks will never get their full face value from the current borrowers, nor by foreclosing and then re-selling on the open market. No one will pay face value for paper on assets worth only 50...75% of the nominal value. As others have said. If the banks foreclose, become the owners, and then sell on the open market; the vultures will buy at bargain rates. They'd actually get more by re-negotiating theprinciple & interest, and hten lewtting stability & an improving housing market re-assert itself. The big hang-up is the puritanical element of the American public morality. No one wants to help the profligate, UNLESS they are rich. Most seem to want the borrowers to end in financial ruin, even if it hurts themselves, too! Getting beyond this morality will be very hard.

[maxgen]

We have learned to be very envious of our neighbor's new lawn mower; while allowing "our betters" to cheat us out of a rightful share. The wealthy class has taught us well to compete with one another and squabble over race, religion and other small matters while they are robbing the store and stealing from the treasury.

The elites have convinced us they are deserving and capable and smart and moral and should be in charge, but they are just thieves in fine clothes. We have the votes to throw them out, but they keep us under control by separating us, bribery and chicanery.

[bighat]

Yes, every incumbent in congress should be repaced every election. Probably help get rid of some of those greedy rich old men that grit spoke about earlier