The Stash

Obama's Case Against Bank Nationalization

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This riff from his Georgetown speech, which Yglesias flagged, is interesting:

On the other hand, there have been some who don’t dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear – the reason we have not taken this step has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.

Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. Governments should practice the same principle as doctors: first do no harm. So rest assured – we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. To that end, in addition to the program to provide capital to the banks, we have launched a plan that will pair government resources with private investment in order to clear away the old loans and securities – the so-called toxic assets – that are also preventing our banks from lending money.

Matt says Obama's not entirely right--that the issue is less that nationalization would cost more than that it would cost more up front. I mostly agree with that, with the caveat that if the Geithner plan works as hoped--that is, the banks are able to raise private capital once the toxic assets are off their balance sheets--then it could end up being cheaper to taxpayers overall. It's certainly possible that, between this hypothetical private capital and the higher earnings banks are booking (thanks to the spread between low interest rates on money they borrow from the Fed and the higher rate they're able to charge for loans), the banks could muddle through without being nationalized.

And, of course, there's always the chance that nationalization would be a complete fiasco--hitting banks with all sorts of politically motivated, counter-productive retrictions which destroy their value as institutions--in which case the taxpayers wouldn't have a great chance of recouping their investment. That would be a lot more expensive than the Geithner plan, and the risk isn't trivial.

So there's a real chance this could be cheaper, which, I think, clears the bar for a presidential speech.

Relatedly, Obama does seem to chafe against the accusation that he's coddling Wall Street. That's not surprising--I'd chafe, too. But the tone is slightly more defensive than I'd expect.

Update: I should add that I think the banks are going to need more government money any way we slice it--I don't think there are many disinterested observers who dispute this. And probably a lot of it. But maybe not quite as much as we think now, because the Geithner plan could have some positive effect, and profits could continue to be okay. (Though these sorts of shenanigans don't inspire confidence.) I'm now worried enough about the difficulties of nationalization--even temporary seizure--that I'm open to trying this first.

--Noam Scheiber

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