US Banking Crisis: Should Banks Be Nationalized?

Nationalizing banks has been required at times throughout economic history. I accept that to a point. Not this time.

Why? In my view, the difference is:

1) Scale - It's one thing for a government to take over banks with just $ 10-20 billion in assets but there is ~$ 9 TRILLION in our top four banks. This NYT article suggests the FDIC is struggling to manage just $ 15 billion of bank assets.

The government lacks the skill, resources, and incentives to fix these entities effectively.

2) Disincentives - The disincentives that nationalization (and the threat itself) creates for fresh capital is very real. If you want to chill capital formation on a unthinkable scale and divert equity capital away from the US banking system for years to come...go my guest...nationalize away.

Keep in mind many banks that behaved well during the boom are now getting into trouble because of others' bad behavior and systemic issues (ie. mark to market). The question I have is this: Can you believe so many seem to think it would be a good idea to wipeout equity of a well-run bank that got into trouble by the excess risk taking of others and systemic flaws? How do you suppose risk capital around the world would view future investments in US banks if that happens?

If we want a better capitalized/less leveraged banking system in the future the process needs to encourage private capital. Wiping out equity in a cavalier manner makes equity harder and more costly to raise.

The regular band of experts that cycle through on CNBC/Bloomberg will have "been right" about the need to nationalize but at a cost to the country I don't think they have thought completely through. Pretty soon the emergency will be so great the Obama Administration will have no choice. That would be a terrible and unnecessary outcome.

It's unfortunate those who make provocative general statements re: nationalization do not using their visibility and influence more productively.

Statements like "the entire US banking system is insolvent" and calls to nationalize are feeding the fire we have set. Banks are not anywhere near insolvent today on an intrinsic economic basis. They are becoming insolvent on a regulatory basis. If you mark book values to recession spot market pricing you could theoretically bankrupt any banking system in a crisis. We've learned over decades that forbearance is wise for banks when no one's in the mood to buy assets. What's your car worth if you have to sell it by 10 am tomorrow? How about if you have a year to sell it? Two materially different prices. If we marked to market in the 80's or early 90's every major bank would almost certainly have failed. At one point in the early 80's the losses exceeded capital by approximately 3x for major banks but we allowed the banks to "earn their way out" as long as they had the capacity to do so.

We need to do something similar this time around. Patience and regulatory forbearance for those banks that are economically sound but under some regulatory capital pressure. Private capital needs to believe that equity won't be wiped out in an arbitrary manner.

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US Banking Crisis: Should Banks Be Nationalized?
US Banking Crisis: Should Banks Be Nationalized?
Reviewed by Pisstol Aer
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