Posted by: Nicholas Davis | March 9, 2009

An overview of the nationalization debate

Bank nationalization seems the biggest thing on Econ blogs at the moment, not to mention that the word “nationalize” is getting a good run in the traditional media with some big names coming out for (Greenspan, Roubini) or against (Bernanke, Bill Gross) the concept. But what does nationalizing the banks actually mean, and why is there such a big debate over it? I thought I’d provide links giving an overview of the argument to help you decide whether to pile into Citi tomorrow.

A nice rundown of what different approaches to nationalization could mean is provided by the Baseline Scenario, in James’ post Nationalization for Beginners:

As I see it, there are at least five different meanings of nationalization.

1. Owning more than 50% of the bank, by which people typically mean owning more than 50% of the common equity…
2. Consolidating the bank onto the government balance sheet

3. Turning the bank into a government agency

4. FDIC-style conservatorship

#4 is what most proponents of nationalization mean. … In addition, there is another type of nationalization that must be discussed and that, in fact, has largely occurred:

5. System-level  nationalization

Once the definitions are in place, it’s time to drill into the two main positions. A friend and I were debating the other night whether or not it was actually practical to nationalize the banks in the US, and whether that is the reason Tim Geithner and others are against the notion. Dealbook points out some of the practical problems in a nice post here:

SO, on closer inspection, the best-sounding arguments for nationalization are really arguments for bullet-biting. Worse yet, even talk about nationalization can be harmful if it puts bank stocks under further selling pressure. After all, who wants to own a stock whose value is heading toward zero? Which is why Mr. Bernanke and Mr. Geithner have taken pains to beat down rumors that nationalization is coming.

But then Dealbook goes on to say that we should pursue a good bank/bad bank strategy first, which I still don’t fully understand, as I can’t see how you can legally strip out the good assets and leave the liabilities behind without actually taking over the bank completely first – wouldn’t bondholders object rather loudly? Luckily Paul Krugman supports my confusion in this regard, which makes me feel a bit better.

Martin Wolf provides one of the best overviews of the debate in the FT and concludes:

We are painfully learning that the world’s mega-banks are too complex to manage, too big to fail and too hard to restructure. Nobody would wish to start from here. But, as worries in the stock market show, banks must be fixed, in an orderly and systematic way. The stress tests should be tougher than now planned. Recapitalisation must then occur. Call it a banana if you want. But bank restructuring itself must begin.

If you still want more, check out Brookings’ latest report “Bank Nationalization: What Is It? Should We Do It?”. It covers all of the above plus gives a few international comparisons and some nice gloomy projections courtesy of Nouriel Roubini as a bonus.

Finally, a nice transcript at PBS pitting Paul Krugman v William Isaacs (former chairman of the FDIC). My favourite bit (from Isaacs):

I couldn’t disagree more with the statement that these banks are insolvent or in need of a takeover. They’re not. They’re suffering through a very difficult economy, and, frankly, they’re holding up pretty well.

Oh. Sorry, I didn’t realise that, I thought they were in big trouble. Well, in that case, let’s buy some Citi stock!


Responses

  1. […] Following from my last post about solving the global financial crisis and a previous one about bank nationalization, I’ve just come up with a completely unrealistic way of fixing the global banking […]


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