The New Republic

Yes; nationalization would be awful, cataclysmic, you name it.

Obama needs to do much, much more to repair the Washington-Wall Street relationship, as you put it.  But that doesn't mean that Wall Street is going away or that Washington shouldn't work with it.  How do you think nationalization -- which is the ultimate Washington-Wall Street "partnership" would work?  How should Washington, if it owned the banks, for many, many years: (a) pay its employees, (b) set interest rates for credit cards, mortgages, etc.; (c) value and sell-off assets; (d) not undercut whatever private banks remain (see today's WSJ on AIG's insurance competitors complaining about the government creating an unfair playing field for them b/c it supports AIG); (e) deal with its counterparties (including foreign governments); and (f) manage the global businesses.  

The public has not indicated by any means that it has considered any of these issues or their costs -- directly to the public fisc and indirectly in terms of the amazingly extensive and novel role Washington would play in their lives.  That is part of the problem here.  I think the Obama team recognizes that we already have massive problems with the more limited role that Washington has taken so far in terms of the oversight expectations of the banks and idea that Washington will be able to find and stop every politically stupid thing that they will do.  Without a huge conversation on the consequences of actually fully taking over the banks, with Congress playing its role too, nationalization would be beyond a disaster.  

So, does this mean Geithner's plan will work?  Maybe not.  But I think we have to get to real Great Depression stuff -- i.e., upwards of 20% unemployment or more --  before we really entertain the concept of full nationalization.  This "implosion" as you put it, is terrible, but not at the level that we completely destroy and attempt to replace the financial system as it is.  Krugman's instincts may be right, but I have not seen him -- or anyone else for that matter -- fully game out (i.e., address the points above) what a nationalization of any of the big banks would look like.

- tgolomb

March 23, 2009 at 11:32am

I've asked this before: does the President have the authority to nationalize the banks?  I don't think so; that authority probably has to be given to him by Congress.  And while it's all well and good that a bunch of conservative commentators no one has heard of have warmed on the idea, do you guys really think the Bank Nationalization Bill of 2009 has 60 votes in the Senate?

I don't.  

- ratnerstar

March 23, 2009 at 11:38am

Can it just be that Paulson, Bernanke and Geithner had it basically right to begin with?  We'll see.  It's an awful disappointment to Krugman.  Maybe he'll never get his chance to turn the US into Sweden; that is, the former Sweden.  The current Sweden is telling Saab and its employees to feel the pain.

- lsernoff

March 23, 2009 at 11:55am

To some extent, I think it's just a question of attitude. We already own significant stakes in many banks, we just choose not use those stakes to call the shots--except for the occasional rule about executive pay or what have you. So while it's not the same as conventional nationalization, we do currently have a lot more power over the banks than we're willing to utilize.

The problem is that such assertiveness would bring its own political costs. What if Obama went on TV tomorrow and said we're now going to use our stakes in banks to dictate major changes in their structures? The fallout would be enormous. So yes, we do need some sort of Congressional mandate, if only as political cover. I don't know if the votes are there, but I'd rather see the administration try to get them than concede the battle before it's begun.

- Clay Risen

March 23, 2009 at 11:56am

Ratty, allow me to play some devil's advocate.

Obama could come out and play hardball with nationalization if he needed to. He could come out in public and say, THIS is what we need to get banks on track again, and nothing less will do. He can claim across-the-spectrum support (Alan Greenspan, maybe Lindsey Graham, etc.) for temporary nationalization. Or they can come up with some other buzzword (a la JFK and "quarantine"). Scapegoat the GOP if they get in the way. (Obviously, this would first require a gut-check from Senate Democrats.)

- rozenson

March 23, 2009 at 11:57am

Not buying it, tgolomb.  There have been long periods in modern history where banks in Europe, notably in France, were state-owned.  I don't think this is a desirable long-term state of affairs, but it is hardly the disaster that you portray.  We separate ownership and management today via boards of directors.  We can do the same with state-owned banks.  Particularly if the bona fide intention is to return them to private ownership as soon as possible, I simply do not see your point.  There have been many FDIC take-overs in the past, the sky did not fall.

Indeed, you contradict yourself.  On the one hand, you say public ownership would be a disaster.  On the other, you worry that private banks could not compete.  So, who is the more competitive player, public or private banks?  To level the playing field, all that is needed is a full guarantee of bank deposits during the period that a significant fraction of the banking sector is government owned.  Then there would be no funding cost disadvantage to the remaining private banks.  

We already have a disaster.  Simply declaring that nationalization would be a disaster is not persuasive.

- roidubouloi

March 23, 2009 at 11:59am

Well, then ratnerstar, you are saying that blame for the Obama administration's failure to take the proper course, and for the convoluted nature of the administration's plan, lies with the Republicans who would not cooperate with a sensible program.  That is at least plausible.

- roidubouloi

March 23, 2009 at 12:01pm

Clay --

On your last point, I think you are right that the Obama administration could do quite a bit if it wanted to push around the banks receiving TARP funds.  I think the underlying problem, however, is that the administration currently does not have the plans, political buy-in (put aside will) or infrastructure (i.e., trained govt. overseers) to do terribly more than it is doing today.  It doesn't know how to "restructure" the management -- let alone the balance sheets -- of the banks, and it would take a very long time to figure this out.  In the meantime, if it went ahead and took "control" without a plan, this type of uncertainty would make our present one look like nothing.  This isn't a war that anyone has fought before, and we don't even have the right army.  

So, I don't see this as primarily (or intitially) as a political issue, but rather a policy one.  What exactly would Obama go on TV and say he is going to do to temporarily (several years) control a big chunk of our financial system?  And for that reason, I don't criticize the political choices Obama has made as yet.

- tgolomb

March 23, 2009 at 12:10pm

Roidubouloi, I don't think you've addressed my points very well.  Do you really think that government having 100% equity ownership of a bank would not lead to its control of the board (wouldn't Treasury -- let alone Congress -- demand it)?  Otherwise you are advocating a partial nationalization like AIG, which has found to be a very wanting model by all.  Can you describe at all how a French or Swedish model would work for a substantial portion of the US banking sector?  

Finally, deposits are not the only source of capital for banks, of course.  Banks issue debt and raise equity -- both of which would be substantially more expensive for a private bank competing with the federal govt. (equity would be directly provided by the feds to the now-public banks and private investors would likely be scared off from the remaining private banks for fear that they may be taken over as well; and debt issued by a public bank would have the implicit (if not explicit) backing of the fed -- and thus a much lower risk of default than a remaining private bank).

I am not opposed to nationalization per se (and I certainly do not condone the status quo on Wall Street).  I just don't think anyone has publicly thought it through.

- tgolomb

March 23, 2009 at 12:27pm

One other thing, roidubouloi, the analogy to what FDIC does is not equivalent to taking over one or more major US banks at the same time.  FDIC does not administer and wind down global investment banks and insurers.  We don't have the infrastructure to do this yet.  So please -- we should all be a bit more careful here about what we are capable of doing.  And unless the sky has completely fallen, I don't see why we would rush in.

- tgolomb

March 23, 2009 at 12:30pm

roi- No, I'm not saying that.  Short of nationalization, I'm sure there are other paths besides the one the administration has chosen.  Maybe they would be better.  

As I've said repeatedly, I'm not really qualified to judge one plan vs another.  I rely on the smart people to do that.  My sense is that the smart people consensus is that the administration's plans are not adequate and that worries me.  But if the options are, a) the President's plan, and b) nationalization, then I'm REALLY worried, because b isn't really an option at all right now.  Not just because of Republicans, either; I doubt a bill giving the President authority to nationalize banks would get even 50 votes in the Senate.  The political downsides are just too big.

I think a lot of people have a serious case of wehavetoactnow-itis, too.  After the last eight years, and I'm including the first few months of the Obama administration in that, I'm getting extremely suspicious of claims that we have to act now.  If nationalization is the answer, it will still be the answer in a few months.

- ratnerstar

March 23, 2009 at 12:40pm

Why is FDIC directed receivership off the table?  It worked with IndyMac and Washington Mutual.  Why can't we just use the laws we have in place?

- acria multa

March 23, 2009 at 1:27pm

Maybe we should take out an insurance policy from AIG. That way if nationalization is tried and fails we can collect from ourselves whatever it takes to try something else instead.

At the same time we can move K Street right into the Capital Building. This will facilitate in the creation of a brand new hybrid branch of government. Contracts can be drawn up to entice private capital such that if the ventures fail the taxpayers can write checks directly to the banks. There will be no need to involve Congress at all. At least not until the 2010 election campaigns.

george

- iambiguous

March 23, 2009 at 1:46pm

As pointed out in some post here a few minutes ago by an IMF director, until the banking sector is cleaned up, economic stimulus is just snow melting on a hillside.  So, if we want to get the economy going, we need to fix the financial sector.  Are we on the brink of a depression?  Probably not.  Is our procrastination digging the hole deeper making severe recession and/or lengthy recession that much more likely?  Yes, in my opinion, we are.  That is what makes this urgent.

Yes, ratner, if nationalization is a political impossibility until the disaster is already upon us, that is a very big problem and you should be very worried.  Because, one way or another, the Treasury is going to fill the capital hole in the banking sector.  The only question is whether it will do so in a manner that wipes out investors in insolvent banks, as I have repeatedly advocated, or in a manner that rescues them while recapitalizing the banking system,  There are no other options.  Management is a separate issue

Nationalization in terms of equity ownership does not imply that the government must directly manage the banks any more than shareholders do now.  AIG is a singularly bad precedent because it was left with a pile of government money and no one with a meaningful equity stake to watch the store -- and without anyone from the government to watch the store either.  It does not have to be done that way.  The claim that state ownership, however temporary, implies direct, politicized management is what opponents, particualrly convinced libertarians, use to scare us into the idea that our only choice is to shovel money into the pockets of bank investors so that they will, please, please, please, continue to manage institutions they have bankrupted. It is possible to be a passive owner, as public shareholders are.  It is also quite possible to find equity co-investors for some amount, even if it is premature to sell the whole thing back to the private sector, to take the management lead.  On the other hand, if a bank really is in need of new management, what is the point of continuing to let it lose the taxpayers' money in the form of insured deposits, just so that we can say we haven't nationalized anything?  Do you solve a bona fide management problem by just pretending it doesn't exist?    

The issue of private banks being disadvantaged in raising capital is not a present one.  Temporarily state-owned banks are not going to be competing for capital in the private market until returned to private ownership.  

- roidubouloi

March 23, 2009 at 1:53pm

acria,

For the FDIC to take control, it needs formally to "fail" the bank, declare it insolvent.  Dispute over the value of toxic assets makes this difficult to do without some additional authority from Congress that the administration seems totally unwilling to ask for.  And no WAMU's holding company is suing the Feds claiming that the bank was sold for too little.

- roidubouloi

March 23, 2009 at 1:55pm

Actually -- FDIC can only take over thrifts and the Office of Thrift Supervision does not oversee any of the non thrift portions of either pure investment banks (like former Lehman and Bear Stearns) or mixed entities like Citi and JPMorgan (I have no idea how Goldman and Morgan Stanley are now regulated).  FDIC couldn't take over all of Citi even if it wanted to -- it would have to partner with the Fed and other regulatory bodies to figure out what to do with all of the pieces (e.g., insurance, investment banking operations, foreign holdings, etc.) that are under different agencies' and countries' jurisdictions.  It would be a mess.  Also, the assets that could be put in receivership vary from entity to entity.  

Again, doable in the crisis of crises, but unwise if we don't have the infrastructure in place first.  

- tgolomb

March 23, 2009 at 2:54pm

Asking Congress for this authority seems like a much easier thing to do than these ridiculous bailouts.

So pretty much the reason they aren't going this route is because the end result is that Citi and maybe some of the others will be eliminated.  And those banks are using all the influence they have to prevent that.

- acria multa

March 23, 2009 at 3:00pm

First of all let me say that I don't know anything about economics, so I don't know if this is a good plan or not.  It's not my area of expertise.  But I think that one of the problems for Geithner has to do with the American pysche, not Geithner himself.  In one breath, we say we want a politician who is not a snake oils saleman.  Someone who can lie to us right in our face, and be doing dirty behind the scenes (i.e. Williams Jefferson, Bill Clinton, Dick Cheney, GWB, Charlie Rangel, etc).  But in reality, whenever we are faced with such a candidate, we inevitably dislike them, i.e.  "he doesn't seem to know what he's doing".  "He doesn't seem confident".  That's what we do.

Geithner's problem is that is he was not nor was ever a career politician.  For most of his life, he was a civil servant he was not in the public eye.  So all of a sudden he is thrust into the political spotlight, and because we like our politician "polished" no matter how much we hate, "fake ass" politcians, that's what we Americans seem to like and want in our politicians.  A polished face, and nothing else can fool us for 8 years (and sadly, the last 8 years, we didn't even have a polished face in the WH).  Obama for good or bad, has lived much of his life as a politician and a public face.  He is obviously comfortable there, so any and all of his administration compared to Obama will be lacking (see some earlier comments during the primary about Axelrod, Gibbs, Burton, et al).

As I said, I don't know if Geithner's plan is right or wrong, people here and elsewhere on this blog with more expertise can tell you that, but I do think, the guy deserves a chance.  He like Obama has only been in office for 2 month.  

- lamh31

March 23, 2009 at 4:09pm

As far as I know, tgolomb, the FDIC can take over any bank it insures in the case of insolvency.  That would mean Citibank, N.A., a subsidiary of Citigroup, a bank holding company.  That is the piece would ought most to care about.  Its brokerage business would be regulated by the SEC via some SRO (self-regulatory organization, most likely the NYSE in Citi's case).  Insurance companies are regulated by the states, not the federal government.  All of these regulated elements should be separately incorporated and are not necessarily adversely affected in terms of balance sheet by the travails of the bank and the bank holding company.  The bank holding company is regulated by the Fed, although the scope of this regulation is pretty limited.  Foreign branches and subsidiaries would be regulated by the country where they are located, just as foreign branches here are.  It is a complicated, but not THAT complicated, particularly since there is no particular reason for the public to care about the fate of the holding company and its investors except to the extent that, like AIG, its liabilities to other important financial actors might threaten them.  

I continue to believe that the way to clear up this mess is for the Fed to guarantee bank deposits and interbank liabilities and customer accounts with securities firms and then let them all default if they cannot pay so that the losses come to rest and their investors take the hits they so richly deserve.  Lehman Bros is still functioning; the useful pieces just belong to someone else.  Same with WAMU.  Separate any bank or brokerage firm that is attached to an insolvent parent and recapitalize it as necessary.  Much cheaper than what we are now doing because it provides capital only where it is needed for a public purpose without trying to rescue every investor in the world, and it gets it over with.  We cannot keep chasing the losses around the system.  It is like that Chinese circus act with the plates spinning on poles where a guy has to run back and forth from one to the other non-stop.

- roidubouloi

March 23, 2009 at 10:41pm