JONATHAN CHAIT JULY 9, 2010
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[Guest Post by John B. Judis]
Want to make me happy? Read carefully James Galbraith’s essay, “Scare the Hell out of Bankers,” on our web site. And read it all the way through because the argument isn’t clear until the end. It’s one of the best things I’ve read on the role of finance in the recession and the recovery. It goes beyond the debates liberals had 18 months ago about finance.
First, on the question of nationalization of the banks. At the time, some of us held out for nationalization of the big banks as the only way to forestall a depression. That proved to be wrong. It was possible to prevent a depression without the government taking over the banks. But Galbraith suggests that by taking over the banks, the government “could have achieved clean audits, replaced top management, cured destructive compensation practices, shrunk a bloated industry, and cut the banks' lobbying power and therefore their capacity to obstruct financial reform. The way to write-downs of bad mortgage debt and therefore to financial recovery would have been opened.”
Second, on the question of whether preventing the banks from collapsing would abet the recovery, which is different from the question of preventing a depression. The administration’s view was that reviving the banks would revive the economy. That proved to be mistaken. Galbraith’s view is that TARP and other government measures have aided the banks themselves without aiding the economy. The banks remain water-logged with bad debt and are reluctant to make loans. Eventually, these debts will have to work their way out of the system, and this could take years, as it did in Japan in the 1990s. To aid a recovery, the government itself would have take on the loan functions of the banks.
Galbraith writes that “we need to create new, policy-focused financial institutions like the Reconstruction Finance Corporation to take over the role that the banks and capital markets have abandoned. Thus, as part of the reconstruction of the system, we need a national infrastructure bank, an energy-and-environment bank, a new Home Owners Loan Corporation, and a Gulf Coast Reconstruction Authority modeled on the Tennessee Valley Authority. To begin with.” Essentially, we have to do what the U.S. ended up doing in the 1940 when defense orders revived the economy, but this time, it will be the industrial equivalent of war orders. I think Galbraith is right about this.
3 comments
I for one am very glad that there was no bank nationalization. I opposed it at the time and it likely would have been disastrous. Sure, you could have cleared away the old management. But confidence in the financial system could have plummeted even more than it did.
- liberal reformer
July 9, 2010 at 12:12pm
I agreed with libref at the time, but for more practical reasons: what does the government do on the day after taking over the banks? I later changed my mind, not for the very good macro reasons set forth by JG in his essay, but, again, for more practical reasons: the big banks sucked all the oxygen out of the air, by which I mean the melt-down and TARP left local banks, the ones that actually make loans to small business, with neither funds to lend or personnel to evaluate and make the loans (most bankers at small banks either moved to big banks or left the industry in disgust). Big banks (and the government ) like to point to SBA programs, but anyone with any experience with SBA loans knows they are awful, the interest rates too high, the collateral requirements onerous (they want the borrower's house as collateral, for goodness sakes), and the process numbing. Politicians like to talk about small business as the backbone of America (and they are the source of most of the job growth), but the only reliable source of funds for small business, small banks, were left out of the mis-named financial rescue plan. Could it be that none of the decision makers ever worked for either a small bank or a small business?
- rayward
July 9, 2010 at 1:02pm
The thing is, bank nationalization was the conservative way to handle the bailouts. At least, it would be, if conservatives actually meant any of the crap they claim to believe. If the government needs to pump money into any given private institution, the market already provides a mechanism for doing so: purchasing equity in that institution. Since saving the banking system was obviously the right thing to do, the only question was how to do so, and nationalization of bailed-out institutions was the method that would most have respected the workings of the market. In any rational sense, it would have promoted confidence in the financial sector, because it would have drawn a bright line between sound and unsound institutions, it would have sped the clearing of toxic assets from the system, and it would have given the nationalized banks more credibility when they came off life support than they have now.
- rhubarbs
July 9, 2010 at 2:30pm