Bank Nationalization Redux
Niranjan Rajadhyaksha -
Tuesday, January 20, 2009 5:23 PM
The number of economists and commentators saying that the Western financial system should be nationalized is swelling.
1. Paul Krugman thinks it is unfortunate that "Washington remains deathly afraid of the N-word --- nationalization.
2. Willem Buiter wonders what needs to be done to make banks lend again. He says it is time to take "all the banks into public ownership. With the state as sole owner, the existing top executives and the existing board members can be fired without any golden handshakes. That takes care of one important form of moral hazard."
3. Even The Economist --- gasp! --- asks: Why not nationalize? "Time to quit mucking around and make with the nationalisations."
4. Felix Salmon says nationalization is the best alternative. "It's transparent and easy to understand: if a bank is insolvent (and the FDIC is good at making those determinations), then simply nationalize it. That's what the Swedes did, and that's what we should do too."
5. Chris Dillow says nationalizing banks is not a bad idea. "The simple case for nationalizing banks is that they would be able to raise cash much more cheaply and easily than they can now; before today’s Bank Rate cut, 3 month Libor was 3.8% whilst the 3 month T-bill rate was just 1.7%. This would almost automatically allow them to increase cheap lending."
6. Chris Wood of CLSA: "In the US and Britain most of the big banks have now become a weird hybrid of public and private sector, given growing government equity stakes in these banks. This raises the issue of the deeply flawed policy response to the crisis. This is that if the authorities are not prepared to let insolvent financial institutions go bust, which would be the quickest, most effective way to correct excesses, as the Lehman precedent demonstrates, the next best way is to nationalise the, in effect bust, banks outright."
Note: Thanks to Gopi who pointed me to the Chris Wood piece.
Of course all these worthies want banks to be nationalized to restructure them and ease the credit crisis. They agree that privatization should follow a few years down the line.
The debate is about temporary nationalizations rather than permanent public ownership of the lending function.