The Financial Times is reporting that the man they describe as the "high priest of laisser-faire capitalism" is backing a temporary nationalization of the insolvent banks:
"It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring," he said. "I understand that once in a hundred years this is what you do."
Wow! Joining Joe Stiglitz, Paul Krugman, Nouriel Roubini, James Galbraith and other major economists, Alan Greenspan now supports the "left wing, DFH answer" that the Obama adminstration, i.e., Summers and Geitner, has been resisiting. With Senator Graham's support Sunday, I think we're seeing bipartisanship. :-)
More, after the fold.
More from the Financial Times regarding Mr. Greenspan's comments:
The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.
In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.
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The former Fed chairman said temporary government ownership would "allow the government to transfer toxic assets to a bad bank without the problem of how to price them."
Joseph Stiglitz has said for several months that he believes many of the major banks are effectively insolvent. Stiglitz received the Nobel Prize in economics in 2001. He served as as chairman of the Council of Economic Advisers for President Clinton from 1995-1997. He was chief economist of the World Bank from 1997-2000 and was a lead author of the 1995 Report of the Intergovernmental Panel on Climate Change, which shared the 2007 Nobel Peace Prize. Recently, Stiglitz said the nationalization was the only way out:
The fact of the matter is, the banks are in very bad shape. The U.S. government has poured in hundreds of billions of dollars to very little effect. It is very clear that the banks have failed. American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster.
Nationalization is the only answer. These banks are effectively bankrupt.
Nationalized Banks Are "Only Answer," Economist Stiglitz Says
Similarly, Nobel Prize winning economist, Paul Krugman, has endorsed temporary nationalization for at least a month:
A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: It seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, Resolution Trust Corp.; paid off enough of the banks' debts to make them solvent; and sold the fixed-up banks to new owners.
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Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word – nationalization.
The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
Paul Krugman: Voodoonomics is making zombies of dying banks
Nouriel Roubini, the NYU professor and economist who warned of the financial collapse based on the real estate bubble long before it occurred, also endorses nationalization/receivership:
As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains.
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Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.
Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:
First -- and this is by far the toughest step -- determine which banks are insolvent.
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Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.
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Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.
The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.
Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.
Nationalize the Banks! We're all Swedes Now, By Matthew Richardson and Nouriel Roubini
When Senator Lindsay Graham is seemingly endorsing it, we finally have the bipartisan promised land:
This idea of nationalizing banks is not comfortable," said Sen. Lindsey Graham (R-SC). "But I think we've got so many toxic assets spread throughout the banking and financial community, throughout the world, that we're going to have to do something that no one ever envisioned a year ago, no one likes. To me, banking and housing are the root cause of this problem. I'm very much afraid any program to salvage the banks is going to require the government... I would not take off the idea of nationalizing the banks."
HuffPo
President Obama is hesitant, but has not totally ruled it out:
Q. So are you saying that -- do you foresee a point where it would be necessary to follow the Swedish model and have the government take over some of these banks? Or is that -- are you ruling that out as impractical -- even at a point down the road?
Obama: My absolute goal is to make sure that our financial system is set and that we get credit flowing again, that homeowners, small businesses and large businesses will get -- invest and create jobs and get this economy going again. I’m going to be very practical in terms of how to approach it.
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But here’s the bottom line: We will do what works.
snip
Q. Just to follow up, if I hear you correctly you are saying that you could reach a point where you have to go further in terms of the government. If what you’re doing now doesn’t work --
Obama: I think what you can say is I will not allow our financial system to collapse. And we are going to do whatever is required to get credit flowing again so that companies and consumers can do their business and we can get this economy back on track.
Obama Interview Transcript from Feb 13, 2009 interview
President Obama will not allow our financial system to collapse and will "do what works." Most economist, from the right, center, and left, are suggesting that nationalization/receivership of insolvent banks (Bank of America? Citibank? Who knows which ones are not solvent?) is what works and what will prevent the financial collapse. I suspect Geitners' plan, which some have called backdoor nationalization, will end up coming through the front door. I expect recivership of several "too big to fail" banks to be the end result of Geitner's plan.
As Greenspan said, it is the least bad option left for policymakers. It will stop the bleeding, but wee still have a long way out of this Depression. The beginning of the end will start at bank nationalization, or, its less ideological description: bank receivership.
Update I: One of the best bloggers I know recommended nationalization last October!
Nationalisation is the solution, by Jerome a Paris
Jerome consistenly brings an excellent analytical grasp of economic issues and a humane and left perspective that I greatly value.
Here is some of the diary by the "dirty left wing blogger," Jerome:
Nationalisation is the solution
by Jerome a Paris [Subscribe]
Tue Oct 07, 2008 at 02:54:39 PM PST
So far, the US government has been quite imaginative in finding new ways to hand over public money to the financial sector with nothing to show for it. I've been saying for a while over on European Tribune, but it's time to say it loudly here: there is no other endgame for the financial sector than wholesale nationalisation so that (i) lending to the real economy can restart and (ii) the cleanup (of bad assets, and badder bankers) can be started.
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[F]rankly, I see no other solution than the full nationalisation of all establishments that show any sign of weakness, and the massive netting out of positions to clean up things as much as possible.
The thing is that the longer this takes to happen, and the bigger the mess to clean up. And yet it's not happening - mostly for ideological reasons (nationalisation = socialism = evil; somehow the same logic does not seem to apply to the generous but pointless hosing of public money on the bankers that created the mess in the first place...)
Say it loud: Nationalisation is the solution!
My bolding! Jerome was right.