03/26/2009 05:12 am ET Updated May 25, 2011

Death To Zombies: Nationalize Banks Now

I suspect the whole "public fear of nationalization" is just something cooked up by Bank of America's PR department to save BOFA shareholders the pittance they have left. In case it isn't, however--in case there are still folks out there who think "nationalization" means state-owned banks in perpetuity--Paul Krugman explains today why this isn't the case.

Nationalization does not mean "government-run banks." It means temporary seizure and restructuring. Customers are protected. Depositors are protected. Jobs are protected. The government puts the valuable parts of the bank back in private hands as soon as it can.

The FDIC is already "nationalizing" two banks a week: It grabs them, chops them up, and sells off their parts, solving the problem once and for all. And it's what we should do to Citi, BOFA, et al, now instead of later, so we can get started on the road to recovery:

Here's Krugman:

The case for nationalization rests on three observations.

First, some major banks are dangerously close to the edge -- in fact, they would have failed already if investors didn't expect the government to rescue them if necessary.

Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can't risk letting much bigger institutions like Citigroup or Bank of America implode.

Third, while banks must be rescued, the U.S. government can't afford, fiscally or politically, to bestow huge gifts on bank shareholders.

Let's be concrete here. There's a reasonable chance -- not a certainty -- that Citi and BofA, together, will lose hundreds of billions over the next few years. And their capital, the excess of their assets over their liabilities, isn't remotely large enough to cover those potential losses.

And then Krugman sums up the Obama administration's approach, which, sadly, is the same as the Bush administration's approach--most likely because the same general, Timothy Geithner, is hatching the plans.

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.

Now the administration is talking about a "public-private partnership" to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.

Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis. (Krugman's full piece is here)

And how could this be done? By being honest about the results of the coming "stress test." Today's latest plan--the conversion of taxpayer preferred stock to common stock in Citigroup--would help Citigroup, but not the taxpayers. It's time to stop formulating half-measures and just bite the bullet and take Citigroup over.

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