The times they are a-changin’... The nationalization idea is gaining momentum. Along with with Jérôme's diary and the already mentioned papers from Paul Krugman and Willem Buiter, other voices promote it as an unavoidable policy:
For once, Gordon Brown is guilty of understatement. The other day the prime minister remarked on the rising public anger at the behaviour of Britain's banks. Unbridled rage would have been a more accurate description of the national mood.
On a recent visit to Washington I heard several people say that when the reckoning is finally made some big Wall Street figures are going to end up in jail. My impression is that many on this side of the Atlantic would like to see one or two British bankers join them.
Dissembling, I have concluded, is hard-wired into the banks' DNA. Mr Brown seems to have encountered the same lack of candour in his discussions about rather larger sums than my now-reduced overdraft.
The prime minister has no option but to pay up. To say that taxpayers are appalled is not to conclude that the banks could be left to tighten the noose on the nation's economy.
Mr Brown is at pains to say that all this does not amount to a blank cheque for the banks. Alistair Darling, the chancellor, insists that the price of the insurance scheme will be a "lending responsibility agreement" with precise targets for new credit for individuals and small businesses.
Now it has gone this far I cannot understand why the government did not take the next logical step of assuming majority stakes in all those institutions now dependent on public money
For the moment, though, I cannot think of a more popular policy than shooting the bankers and nationalising the banks. It might even win Mr Brown an election. Come to think of it, it could also be the way to get us out of this mess.
Even The Economist chimes in!
AS TROUBLES in the banking industry have moved back into the limelight, the need for a broader, and more effective solution has again become clear. While the use of the initial TARP allotment has prevented any immediate collapse, it seems clear that fears of insolvency (and actual insolvency) are going to remain a problem. Some banks will be forced to return to the trough repeatedly, and lending, in general, will remain moribund.
But it seems to me, based on an ongoing blogospheric discussion, that nationalisation is the only good option left. The basic problem is this--some banks are likely insolvent. Any option that solves the problem by buying bad assets will either fail (if those assets are bought at face value--recall, the banks are insolvent) or will succeed by buying those assets at well more than they're worth. The latter option is a large and generous gift to the bank's shareholders.
These banks grew so large that their faliure threatened the global financial system, and then proceeded to fail. To simply hand over the money necessary to return them to solvency would abuse the taxpayer's trust, reward bad behaviour, and send a terrible signal to other bad financial actors out there. Time to quit mucking around and make with the nationalisations.
The Financial Times has created a collection of links on nationalization:
To nationalise or not to nationalise?
The UK government has shown its hand. TARP II is underway in the US.
If the latest gamut of policy responses don't work - and there's plenty who say they won't - then nationalisation of banks is very much the only option left.
With that in mind, FT Alphaville has rounded up a selection of the pro-nationalisation views currently on offer .
Here are some excerpts:
Britains biggest banks are "technically insolvent", Royal Bank of Scotland said yesterday, as the global banking industry was rocked by another day of turmoil, including the announcement of $23bn (£16bn) of new losses from Merrill Lynch and Citigroup, the giant US institutions.
Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that "the domestic UK banks are technically insolvent on a fully marked-to-market basis".
Now there is a cost to these guarantees. They are expensive - especially in an ex-ante sense. The taxpayers are taking a risk - and they should be compensated for that risk. That is a basic capitalist principal - but it also is just plain fair. Real capitalists nationalise.
What strikes me is the weakness of the arguments raised by the opponents to nationalisation. Most of the time, it boils down to the rigid ideological belief in the fact that governments are always and inevitably bad owners / managers...
A good example is given by John Gapper in the FT:
The fact remains that governments are bad owners for banks, as anyone who has followed the history of Germany's regional state-owned banks can attest. They are heavily conflicted because, although politicians like to castigate bankers for risk-taking, they also push them to lend freely in order to make the voters happy.
But in the first part of his paper, John Gapper makes strongly the case for the nationalisation. And, at the end, he even shows that only the nationalisation of the entire financial system would make sense:
Prof Buiter argues that one clear benefit of nationalisation is that it would eliminate the uncertainty over how to value troubled assets taken from the balance sheets of banks. Any government that owned both "good bank" and "bad bank" could value them as it wished.
In practice, that would only be true if the entire global banking system, complete with all mortgage and asset-backed securities, were nationalised. Sweden could value Swedish property loans as it saw fit in the 1990s, but global finance has taken that luxury away.
To be honest, he has a point when he underlines the sheer size of the task:
More specifically, the costs of a full public recapitalisation of banks in the US or UK, in addition to the public ring-fencing of their troubled assets into state-controlled "bad banks", would be enormous.
This is particularly true of the US, which cannot just acquire a few large banks, like the UK or Sweden, and be satisfied that it has dealt with most of the banking market.
The plan being mulled by Barack Obama's new administration and the Federal Deposit Insurance Corporation to corral bad assets into a vehicle like the Resolution Trust Corporation, which took Savings and Loan assets in 1989, could cost $1,000bn.
Then consider that the top 10 US banks, which are now regarded as short of capital, have equity of about $800bn. Nationalisation of only these banks, complete with recapitalisation, could bring the bill to the taxpayer to more than $2,000bn, which puts the $350bn left in the Treasury's $700bn troubled assets relief programme into a very sobering perspective.
This is certainly true, but, given the situation, it would be even harder (and costlier) for the banks to find these huge amounts of money on the market...
Governments would need to take over all the assets of a bank and take charge of daily operations for a nationalization to trigger payouts on credit-default swaps, according to Bank of America Corp. analysts.
Simple nationalization wouldn’t be enough to settle the derivatives, which protect investors against a company defaulting on debt repayments, New York-based strategist Glen Taksler wrote in a note today. A collapse in share prices of New York-based Citigroup Inc. and Royal Bank of Scotland Group Plc is stoking speculation the U.S. and U.K. will be forced to take full ownership of some financial institutions.