| Nationalizing our banks? |
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| Wednesday, 18 February 2009 01:28 | |
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It seems that the current financial crisis may threaten a lot more than our individual retirement accounts; it could threaten the foundation of our capitalistic economic structure that's based on free markets. We are talking about all the buzz over nationalizing the U.S. banking system. On one hand, such a drastic move could conceivably restart the flow of capital and get the economy moving again, but we think it has the dreaded word "socialism" stamped all over it. Few of us think it's a good idea to turn the banks over to Washington bureaucrats – when we think of policymakers, the last thing that comes to mind is innovation and the creative spirit. On the other hand, nobody is about to lavish praise on the banking executives who used their creative spirit and innovative ideas to sink the banking institutions in the first place. Oh, it’s not that they didn't come up with novel approaches to investing, it's just that it included the structuring and rampant proliferation of mortgage backed securities. And we all know how that turned out. We are very uneasy about this whole idea, yet there are high profile economists throwing their support in favor of nationalizing banks. For instance, Nouriel Roubini, a diehard supporter of free markets has dedicated most of his time as a professor at New York University's Stern School of Business singing the praises of the free-market economy. But now Roubini is proposing an all-out government takeover of the banking system. In his opinion, the U.S. financial system has reached such a dangerous tipping point that the Treasury's plan, while having some merit, is too late to save a sinking ship. Last year, Roubini predicted that banks and other financial entities could lose as much as $1 trillion. Now he's upped figure to $1.8 trillion. The original bank bailout was $1.4 trillion. That means the U.S. banking system is roughly $400 billion in the hole. He doesn't claim that nationalizing banks would save the economy, but it could take care of the toxic asset problem and stop the current death spiral. Even former Federal Reserve chairman, Allan Greenspan, the guy they used to call the high priest of laisser-faire capitalism, has jumped aboard the nationalization bandwagon calling it the least bad option left for policymakers. Not exactly a glowing endorsement, but nevertheless, he can't come up with a better plan. While he's not calling for the same level of takeover as Roubini, he does feel that the U.S. government, either through the Federal Deposit Insurance Corporation or some other mechanism, may have to at least nationalize some banks on a temporary basis. Otherwise there may be no way to restore the flow of credit. There are a lot of downsides to this, one being the potential loss for senior debt holders. Those bonds always have to be paid off ahead of any other claims against the bank, so those stakeholders would have to be protected. In any event, nationalization will not be a blanket solution for the banking system. In some cases, it might not even be necessary. We're all for taking this on a case-by-case basis but we certainly don't believe this should be viewed as anything other than a temporary fix. If it's inevitable, let's at least consider letting the banking system gradually stabilize through direct government control and a tighter regulatory environment. Then in a few years, we should expect a staged-in transition putting these financial institutions back into the hands of private management. |
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