The Politics of Bank Nationalization
As a response to the financial crisis, the Bush administration's Troubled Asset Recovery Program (TARP) was woefully inadequate. But its implementation brought to a close a nearly thirty year period during which market deregulation was the touchstone of economic policy. Now, market fundamentalism is dead. As a result of the economic free-fall we are experiencing, the question being asked is whether the government's involvement in the economy is adequately focused or large enough, not whether it should be undertaken at all. Governmental intervention is the new flavor of the month.
But as important as this shift is, it masks an even more important continuity. To obtain office, elected officials still require the financial support of the country's economic elite. In the past, these contributors had the goal of ensuring that their businesses were left alone to pursue their private interests. Now the tide has turned and their viability requires government assistance.
The central actor in this flip-flop has been Wall Street. The financial sector used its campaign contributions to advance economic deregulation. Today, Wall Street continues to be the single most important source of political donations and therefore influence. But now it lobbies for bail-outs, not self-reliance.
Despite the bailouts however, the economic crisis has continued to intensify. This is largely because the financial sector remains dysfunctional. This problem must be solved so that credit can start to flow again. The most straight-forward way to accomplish this objective - an approach the Obama Administration resists - is to nationalize insolvent banks, reorganize them, and then sell them to new owners. Doing so would create a fresh start. And while such an approach obviously would be costly to the government, it would create banks with sound balance sheets and also avoid rewarding those responsible for the present fiasco.
The financial sector vehemently opposes nationalization. To date it has gotten its way. Instead of taking over giant but weak banks, the Obama Administration has chosen instead to provide them with funds in the hope that massive injections of money will rejuvenate them. It is unclear whether this approach - unsuccessful at the moment - will ever work. But what is not in doubt is that the political system still is providing the big campaign funders with their policy preferences.
In this context, the need to reduce the political clout of the financial sector and democratize the political funding system takes on an urgency that can hardly be exaggerated. Clean elections - the public funding of electoral campaigns - have long been thought of as a "good government" process issue. The tendency has been to relegate to it to the political back-burner, especially in a time of crisis. No longer. It now has to be thought of as our best available means to work our way out of the economic debacle.
What is clear is that we need to engage in a wide-ranging and difficult political debate concerning our economic future. The market failures that confront us are the worst that we have seen since the Great Depression. If nationalizing banks or its functional equivalent is to occur, the terms of our political discussions must not be biased by any individual sector, and particularly not by a self-interested financial community.
Nationalizing failed banks will not be an easy sell. The country has had a long romance with markets and the residue of that infatuation persists among significant segments of the population. Such a scheme will evoke a conditioned response of hostility. But dire economic circumstances may well erode that opposition. No one knew before the 1930s that a New Deal would be acceptable to - even desired by - the American people. The 1920s after all, like our current period, was a period of retreat from the progressive reforms of the early decades of the century. It is very likely that today's conventional wisdom too concerning the limits of policy initiatives will be radically altered as the economy continues to fail.
The danger here is that a failure to accept nationalization, joined with a protracted continuation of the current bail-out strategy, risks producing a counter-productive populism. The threat is that taxpayers will rebel against seeing their money thrown into a financial black-hole that produces little or no positive economic response. If such a rebellion occurred, it is at least possible that an atavistic anger could impede the search for financial viability and might even end up with a return to some form of market fundamentalism. After all, if the government botches the job, what choice is there?
As presently structured, our political system is ill-equipped to deal effectively with the economic crisis. To date, the Obama administration's response to it all too clearly reflects the limited range of options that political funders will tolerate. Widening the policy alternatives requires that wealth no longer dictate the political agenda. Public funding of electoral campaigns - especially at the Congressional level - is critical in order to allow us to grapple effectively with the economic crisis.
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The fantasy that putting politicians on the dole will some lead to political nirvana is one of the more ludicrous notions being proposed.
While it's hard for you to accept, politicians have been voting for "deregulation" and "free market" policies (however you wish to define them) for a very practical reason - that's what they personally believe and that's what their constituents (a majority, at least) sent them to office to do. Not your cup of tea, perhaps, but true nevertheless.
The myth that politicians vote the way they do because they've been "bought off" by their donors is beyond insulting, and assumes that there is no valid, legitimate reason a member of Congress would ever vote for, say, Glass-Steagal's repeal or lower taxes or free trade. Well, there are tens of millions of Americans who believe in these things, and quite often they are able to elect people to office to enact these goals. Your contrary assumption suggests that there is no real dissent in America over government policy, which is frankly the rationale behind one-party states where the party represents the "will of the people" (so there's no need for elections, you see) against "reactionary" and "counter-revolutionary" forces that must be crushed.
If you want to rail that "free markets" and "deregulation" have failed, fine, but don't simply assume that tens of millions of Americans who support these concepts don't exist.
Sean Parnell
President
Center for Competitive Politics
http://www.campaignfreedom.org
sparnell@campaignfreedom.org
The "tens of millions of Americans who support these concepts" may exist, but they are in conflict with the hundreds of millions who are harmed by those concepts and want a change.
Let's suppose what you say is true - does that mean that somehow the First Amendment doesn't apply to them, or that their perspective should be eliminated from discussion and debate of public policy issues?
Because that's what so-called campaign finance "reform" is about - limiting and excluding certain voices because you disagree with their content.
Sean Parnell
President
Center for Competitive Politics
http://www.campaignfreedom.org
sparnell@campaignfreedom.org
I totally agree on the need to reform our thinking about solutions to our present financial collapse.
As far as bank nationalization goes - it should not be necessary.
Rather, we need the courage to confront the giant monied power that controls the nation's, and the people's, economic well-being.
We think of the economic system being in the tank, of the financial and banking systems collapsing. In truth, it is the monetary system that is broken.
We have been living on the borrowed time of a failed debt-money system known as fractional reserve banking.
The debt-money system is broken in that it has failed to produce the money necessary to make our debt-service payments. It's that simple.
In truth, it is the monetary system that must be re-nationalized back into the control of the taxpaying American people. Not the banks.
The banking and financial systems can and should remain completely private, promoting the widest form of economic democracy and free enterprise.
We cannot fix the monetary system by focusing on the banking and finance systems. We need a new monetary system to replace the private federal reserve banking system in this country.
That new system is best modeled after that proposed by Milton Friedman in his advocacy of 100 percent reserve banking, and debt-free, government issuance of money.
This is what Lincoln advocated and carried out.
Twenty-First Century Greenbacks !
THE answer to the problem of the broken money system.
Absolutely correct, joe!
Another welcome voice of insight illuminating the real root of the problem; the Banker Owned, Privately held home to the US's Money Supply, the life blood of our economy, the Federal Reserve, which has never been government owned and has never held a reserve of anything. Nor has it ever had an independent review or a Congressional Audit of Efficacy since it took over the control of the Nation's Money Supply with its’ insipid inception in 1913.
JP Morgan, a front man for the banking house of the Rothchilds, created the Bank Panics preceding the passage of the Fed Act in 1913 through whisper and rumor campaigns. And after he lit the fire, was gracious enough to jump to the front of the Newspapers to put out the fire and save the poor uneducated masses from themselves, coerced the other banks to give him their money, and terrorized the Congress and the President until they passed the Fed Act putting the most important tool of commerce into the hands of a few individuals, and here we are today, in the poor house.
Thomas Jefferson - Revolutionary Statesman :
""I know no safe depository of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform their discretion.""
""If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.""
""Whenever the people are well informed, they can be trusted with their own government; that whenever things get so far wrong as to attract their notice, they may be relied on to set them to rights.""
It is '09 , and the people have taken notice.
Monetary Transformation Now !
Dude, who are you trying to kid? The public is sick and tired of these thieves. We are all on to their kleptocracy!! We all want them nationalized and the bums thrown under the bus. Firstly, our regional and local banks are NOT getting nationalized so what do most Americans care about the greedy Wall Street banker except Wall Street. They care nothing about the thieves. Secondly, Americans are suffering and hurting from the banksta's ruinous ways. Foreclosures are mounting, jobs are disappearing, and people are hurting. THEY DON'T CARE ABOUT THESE WALL STREET BANKS. BREAK THEM UP INTO LITTLE BANKS AND GET IT OVER WITH ALREADY!
What time warp are you riding on?
http://eye-on-washington.blogspot.com
Nice post. Some flawed thinking of course. The point is, Nationalization is wholly part a political discussion to start. Nationalization as defined by most is an ideology, not a solution to any of the root cause issues that must be solved.
Many forget that the counter populism in reality, not in politics, is that the people will want their money paid back! Nationalization makes the institutions bankrupt with no chance of payback. Hello!
This political calculation will backfire once people understand that Nationalization means the loans backed will never be paid back and their respective assets along with their intrinsic value are wasted (taxpayers assets once nationalized) via fire sales to vulture investors whom advocated Nationalization to begin with. These investors did this solely so they can get the government to rush into coughing up assets to them for pennies of their worth.
We must start making financial sense and stop the hysteria!
"nationalization" of the largest banks is the worst idea out there. It would wipe out most pension funds and many people who have retirement investments. You really have no idea of the consequences of what you propose. Patience and a steady hand.
Who said? Where do get this information? Let's inform ourselves with reliable, accurate information before we start spouting, stuttering and slobbering about things we do not understand in the slightest.
Mr, Mandle, there are those who believe that an inherent flaw in the Free Market model has been exposed and the world economy upon which it is based is in the process collapsing (I am of this camp), there are others that are determined that this is merely a normal part of the business cycle and will ultimately right itself ... the people who ascribe to this likely are members of the traditional elite or similar aspirants to that class who have far more to lose than any working stiff does.
If the elite have their way and convince the politicos to leave things be in hopes of a natural correction ... and they are wrong ... the bottom will fall out of the world economy in an amazing way and they will find themselves wiped out anyway.
We are really at the doing it the "easy way" or the "hard way" stage in this crisis ... and wishing won't make the bad on the horizon go away.
THANK YOU, Mr. Mandle, for so cogently revealing the real movers and shakers behind the facade of our Congress, and what we MUST do about them and their blackmail money.
Just as you intimate, the wealthy funders of the two Parties literally dictate the outcome of the (damagingly under-debated) creation of legislation in Congress. These days, a lot of that hidden pressure is being applied to Congress by the White House and its financial backers, such that legislators simply 'do what they're told' by Party bosses, damn their independent duty to their constituents, or to anything other than financing their next re-election campaign.
Just this month, thanks to reporting by the WSJ, we know that the hidden quid pro quo between the corporate funders and the Parties is underway (just in time to shape the next big bills in the pipeline) in Florida at lavish retreats:
"Senate Democrats will host their biggest campaign contributors at the Ritz-Carlton in Naples, with a Greg Norman-designed golf course and 51,000 square-foot spa. Republicans chose The Breakers in Palm Beach, a Renaissance-style landmark on 140 oceanfront acres, where the lowest-price room this time of year lists at $600, when available. The bills are paid with [Party] CAMPAIGN funds, more of which the parties hope to garner on the trips.
Spokesmen for the Democratic Senatorial Campaign Committee and the National Republican Senatorial Committee declined to comment on the plans."
http://online.wsj.com/article/SB123483886399996643.html
So it’s not time to nationalize the losses of this self-anointed neo-feudal class of trillionaires masters of the universe. Rather, it’s time to shut down their failed banks, to let the greediest investors bite the dust, to claw back any bailout money given so far to them and the banks, and to use this money to jump start the flow of credit into the economy after “nationalizing” (hiring back!) the banks’ existing experts in locating, evaluating, financing, and following-through worthy entrepreneurial ventures in real production and giving them a new institutional backing and responsibilities.
This crisis must teach harsh lessons to the most reckless of investors and bankers, and spare those investors and bankers who tried the hardest to stay away from the greedy madness of the last 30 years, even if only for moral reasons.
Absolutely
Now you have it.
Nationalization is not a cure all.
Let them fail. Use what TARP money is left to start a brand new National bank that we can trust and put our money in. Talk about stimulus.
Yup. Time to make tough choices. No looking back.
Let’s not give them that chance to demonstrate so much loyal friendship. There is no need to save the trillionaires, regardless of how much money they have given to economists, journalists, and politicians and of whether the flow of bribes may stop if the trillionaires fail for good. The banks should be allowed to go through an orderly bankruptcy that preserve their real-economy presence and protect the savings of their non-reckless customers up to say 200k per account and up to say 1 million total net worth per person (IRS-declared), where a sliding scale could be used that reflect how "aggressive" the interest-gathering strategy chosen by each account holder was and the extent to which the account holder chose risky “lucrative’ financial-speculation products over investments in actual production. The necessary paper trail is available…
One should fire everybody in the *failed* banks' upper management (because they failed, duh!) except for whistle blowers and those essential to day-to-day operations, for those managing customer accounts, and for those having expertise in evaluating loans applications by companies that produce actual goods, be they trinkets, essential insurance products, etc.
Social criteria like protecting pensions could also be used by simply dividing the amount invested by each pension by the number of people the pension represents in order to determine what the pension can get in terms of protection and for which individual accounts (since pension-holders who chose reckless financial-speculation products should be protected less).
Start the legal investigations and forget about nationalizing zombie banks.
That’s why the trillionaires have mobilized bribed economists, journalists, and politicians and ordered them to call wolf about the cataclysms that will ensue if the “financial system” fails. “Saving the financial system” is indeed the obfuscating phrase invented by these bribed economists, journalists, and politicians to try saving this neo-feudal class of trillionaires that is “essential“ to what “America stands for” and to “how things should be after we help them out”, as the “radical” Paul Krugman has put it in print repeatedly.
As you may remember, in the middle ages whenever the feudal class created a mess they “rescued themselves” for the “sake of the country” by taxing the hell out of the serfs and the bourgeois, but now with “the triumph of liberty” all of that has changed… yeah right!
Nationalizing the banks will open the gates to all kinds of pompous declarations by congress demoblicans about the government’s solemn duty to honor the contractual commitments that came with the “act of nationalization” bla bla bla, so they can save their trillionaire friends amidst an apotheosis of self-righteous complacency and flag waving.
If the banks are nationalized, the government will become the owner of the banks’ good and bad assets and it will have to assume the banks’ contractual obligations towards their creditors, investors, and account holders. In particular, any contractual guarantees given by the banks to the owners of now-worthless risky “innovative” financial vaporware will become de facto contractual obligations of the government towards these owners.
If we ignore small-fry investors, pension funds etc., these owners are greedy domestic and foreign trillionaires who bought the financial vapor ware with full knowledge of its risks. These trillionaires will lose humongous amounts of money and hence will lose much, if not most, of their economic and political power, if the “financial system” is not saved by the taxpayers.
While I agree with your basic tenets, it may be simpler than crying wolf, simpler than staging a revolution and simpler even than auditing campaign finances (which is complicated only by the fact that you don't want to dig out grassroots).
Just ask the financial sector to explain how exactly their view of capitalism without self-reliance for banks is supposed to work itself through the ages.
Could be interesting to listen to. Or maybe there's only silence. Because, in a sense, the question is already out there. Only the answers aren't forthcoming.
The market fundamentalism is dead as much as the multiplication table.
People who advocate for the free market, by definition do not believe in it. Believing in something assumes that emotions, prejudice, and religious or quasi-religious convictions prevail over empirical data and reason. Hence, people advocating free market solutions do this because logical analysis of the available facts leads them to this conclusion. Therefore, they are not attached to the conclusion, but to the method of reaching it.
Instead of nationalizing banks, the government should stay as the guarantor of the constitutional freedom of enterprise. More at, http://www.huffingtonpost.com/henryk-a-kowalczyk/the-simplest-plan-for-hel_b_167642.html . In this concept, the government does not spend a dime, and does not need any new bureaucracy. Can someone explain to me what is wrong with this approach?
Henryk,
You are demonstrating that you are a market fundamentalist in claiming that free markets are supported by the data. You are dreaming this up. You are living in the fantasy world of free marketeers.
Markets throughout the history of the world and in particular in the United States have shown a tendency towards boom and bust cycles and increasingly short-sighted behavior by market participants. This is why we need strong regulators who can step in and make changes when needed.
I'm sorry if this reminds you of the Communist past of Poland but regulated market capitalism is not the same thing as the blind religious belief in free markets you espouse. An unfortunate joke has been played on the peoples of Eastern Europe where the free market was supposed to be everything that Communism wasn't. Politicians such as yourself have simply run into the arms of the other extreme. As it turns, a "mixed" economy, though it needs a goose occasionally, is a better place to be than a largely unregulated market society.
You've been sold the free market "bill of goods" and need to critically examine where markets work in Poland and where they don't .
Instead of nationalizing banks, Congress should use its power "To coin Money, regulate the Value thereof, and of foreign Coin", and create a National Bank, owned by the Nation and operated for the benefit of her citizens. Nothing has corrupted the value of our currency as much as the current privatized banking and financial system.
Congress should then remove FDIC guarantees for private banks, while backing National Bank deposits by the full faith and credit of the US government. I, and many like me, would move their money to such a bank.
This is for the most part a good suggestion.
I think you should read Alexander Del Mar's book on The History of Monetary Systems.
The only national bank we really need is the Central Bank US to take care of a repository functions of the Treasury (instead of the Treasury having its money in the private fractional-reserve banks).
What Congress needs to use its authority to do is to nationalize the monetary system.
There is no need to nationalize ANY banks.
Banks should be free to make loans using their own deposits and investments.
The private banking system would be regulated on a 100 percent reserve lending basis.
There would be no need for deposit insurance.
Deposit insurance was the interim solution proposed against the Chicago Plan as presented to FDR.
100 percent reserves removes the risks of the depositor's monies being lost.
Debt-free, government issue of the money system.
Twenty-first Century Greenbacks.
I agree that market economics is about numbers, and you are right that the market is the best and most efficient way to deliver goods and services. However, market fundamentalism, the idea that the modern market is a self sustaining entity, is over. Regulation isn't a burden but a necessity, it is the very boundaries of the market itself. Without rules you don't have a market you have a brawl.
None of this would be necessary if CDO's had been regulated properly and Greenspan had used the Fed for what it's for instead of trying to make his friends rich.
You are right though, nationalization is a horrible idea and people really don't get how much money would be destroyed.
well, if the government doesn't spend a dime on this problem then the insolvent banks will collapse and the FDIC will have to step in, which would also force the government to spend money because the FDIC doesn't have enough money to cover the collapse of many major banks. either way, the government will probably end up spending lots of money, so we might as well nationalize them and kick out the crooks so they can't continue paying themselves undeserved bonuses with our money. if the government can turn them into profitable banks again, then we might have a great way of raising money to pay for the national debt. the government may not be the best institution to run a bank, but the crooks who are currently running the banks are certainly worse.
Nationalization means replacing corporate bureaucrats with governments bureaucrats, who may be less qualified, as it is usually with governments jobs. Furthermore, having more power, they will be more susceptible to become corrupted. They will be just people as everybody else.
Perhaps the Obama administration is wiser than some people give them credit for in not jumping on the bank nationalization bandwagon. In all this blogging about it, I have yet to see anyone who is for it actually articulate in detail what benefits it will bring us. The proponents argue that the shareholders deserve to be wiped out since they took the risk and that the troubled banks are technically dead anyway. Setting aside this largely philosophical argument, it could well be that Obama and Geithner understand the costs huge and the knock on effects of wiping out pension funds and modest portfolios will be huge.
"..it could well be that Obama and Geithner understand the costs huge and the knock on effects of wiping out pension funds and modest portfolios will be huge."
They are already all but wiped out. The only question concerning them is, will they be subsidized by the taxpayer.
Nationalization will allow for the quickest route towards restructuring. The banks need it desperately to clean their balance sheets. We already nationalized the banks but have refused to exercise control. The banks also need to be broken apart and made smaller, leaner, and therefore no longer considered too big to fail.
As of now these half measures won't work. Propping up zombi banks will prolong the problem. Obama's team wants to use every option until the inevitable. The problem is that valuable time will be lost.
I don't want to return to this kind of economy. i am not alone. The debt driven "spend baby spend" credit economy must go the way of the dinosaurs. It is economic enslavement of the people.
I don't want to pump money into a Frankenstein monster. Let the big zombies fail and let them be divided up.
I want a National Bank that will set the standard for all the other banks. That is the only place i want any of my money to be from now on. If the government took what is left of the TARP money and created such a bank, giving all of us, the small investors, mutual funds and charities a place to go, it would be the best thing for this country and the cheapest to boot. It would also be a fantastic quick start for a new economy. get it done.
We need to save the honest people. That should be our only goal.
If this bank value is 25B and owe to taxpayers 45B, therefore, this bank is already terminated and the administrators of taxpayers money need to be fired, they lost 25B in this transaction.
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