Sunday, January 25, 2009

Taking Over the Banks

Call it "partial" or "temporary," the momentum for nationalizing US banks is growing across the political and economic spectrum.

President Obama, Paul Krugman writes, is "going to have to decide how bold to be in his moves to sustain the financial system, where the outlook has deteriorated so drastically that a surprising number of economists, not all of them especially liberal, now argue that resolving the crisis will require the temporary nationalization of some major banks."

This follows George Soros' call for "partially nationalizing" banks, a step that "would clear the air and restart the economy."

In today's New York Times, business columnist Joe Nocera recalls the Resolution Trust Corporation, which took over and sold bad assets during the S. & L. crisis of the 1980s, quoting Tim Ryan, who helped direct the response to that fiasco:

"Did the S.& L. crisis cost the taxpayers money? You bet it did--some $130 billion. But, said Mr. Ryan, 'it would have been triple that' without the R.T.C...

"But to carry out this kind of program, the government has to be in control of insolvent banks...Then it can do the same thing the Office of Thrift Supervision did in the early 1990s: close down the worst, sell others to healthier institutions and recapitalize the strongest. You can shovel capital into banks until you’re blue in the face and they are not going to lend so long as they have toxic assets on their books. They are going to hold onto their capital, fearing new losses."

As the Obama Administration prepares to tighten regulation across the financial system with stricter rules for hedge funds, credit rating agencies and mortgage brokers, and more oversight of derivatives and credit default swaps, the banks remain at the heart of the problem.

At some point--and it had better be soon--pouring taxpayer money into the maws of Citicorp, Bank of America et al will have to be accompanied by enough control to get them lending again instead of just fattening balance sheets, merging and paying themselves obscene bonuses.

It will be more complex than FDR's brief bank holiday in 1933, but something dramatic is on the horizon.

Update: On the Sunday talk show circuit this morning, House Speaker Nancy Pelosi actually used the N word. “If we are strengthening them," she said about the bailouts, "then the American people should get some of the upside of that strengthening. Some people call that nationalization."

“I’m not talking about total ownership,” she quickly added. “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?'”

Yes, and not a moment too soon.

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