Breaking news: the MSM is useless. Alright - this isn't breaking news. While I've come to expect the Washington Post's frequent editorializing in its news section against the stimulus and Social Security, every now and then, an article - like this Time piece- is so aggressively misleading that I couldn't let it pass. Since it was apparently too difficult for Douglas McIntyre to do the five minutes of work necessary to lay out the terms of this debate, I thought I would.
McIntyre begins his intellectually lazy Time article with a bit of snark. He notes that Lindsey Graham, who "almost certainly does not have a PhD in economics or finance" and Nouriel Roubini who "probably has several advanced degrees" agree that nationalizing the major banks might be necessary. Would it really be so time consuming to google them and find out what degrees they have? Here, let me google both Graham and Roubini for you. Indeed, Graham does not have a PhD in economics, while Roubini does. While this convergence of elite opinion, both political and technical, could very well be a valid starting off point for a discussion of the pros and cons of nationalization, McIntyre instead chooses more shallow wisecracks - along with a misleading and poorly understood description of how nationalization would work.
Referring to Roubini's recent Washington Post editorial advocating a Swedish-style temporary nationalization, McIntyre chooses to add nothing to his readers' understanding of the issue. Rather, he opts for more snark, saying:
The first counter to his argument is that it is dark over 20 hours a day in Sweden during the winter which causes a level of depression among the population that may undermine their judgment and views of how dire any economic situation is. If this theory is true, banks in Panama will never face being taken over by the government.
How clever. Rather than researching the Swedish financial crisis, and arguing about how relevant that case is to the US financial system today, McIntyre resorts to a lame joke. At this point, I confess to being rather confused. The snarky title suggested that perhaps the entire article was satire. Bewildered, I read on. But rather than a Gail Collins-style stream-of-consciousness piece, McIntyre instead tries his hand at serious analysis. And then I really got mad.
McIntyre more or less lays out the most basic case for nationalization: to prevent complete financial meltdown and global depression, US taxpayers will be on the hook for banks' bad loans, so we may as well get some upside participation rather than simply buying the dud assets. But McIntyre apparently didn't take the time to educate himself about what nationalization entails, because his description of the supposed pitfalls of the process is simply wrong. According to McIntyre:
Nationalization seems tempting because it seems simple. The U.S. owns the banks. They continue to do business as usual, but their balance sheets become, in essence, the balance sheet of the Treasury. In theory, as time passes and the banks become profitable, those profits go back to the government and pass though to citizens in the form of lower taxes. The banks may also end up being sold back into the private enterprise system bringing the government an even better return.
This completely misunderstands the process Roubini and a growing chorus of economists are calling for. No one is suggesting that the government should semi-permanently run Citi or Bank of America. We are discussing temporary nationalization. This means sending auditors to the major banks to perform stress tests. Banks that fail these stress tests and cannot raise private capital will be nationalized. Shareholders will be wiped out and management will be fired. Bondholders will be converted to equity holders. The government will recapitalize these newly constituted banks, and then divide them into good and bad parts. The good banks will then be sold to private investors, while the government will hold the bad banks and gradually unwind those positions, hoping that the market for them eventually recovers. So there is no doubt that banks would be sold back to private investors on a relatively short timeline. As Simon Johnson explained on Bill Moyers, this is a key strategic feature of fixing a financial crisis, because it pits two constituencies within the banking lobby - the bankers and private equity - against one another, helping to break their stranglehold on the government.
If McIntyre does not understand this process, then he should not be writing an article about nationalizing the banks. Furthermore, it renders all of the supposed problems with nationalization he lists moot. No one is talking about the government determining who does and does not receive loans. This is just receivership on a massive scale. Even Greg Mankiw - who has been exposed as intellectually dishonest and a conservative hack - acknowledges the difference between permanent, or semi-permanent, nationalization and temporary receivership. And, like Lindsey Graham, Mankiw admits that receivership very well might be necessary.
But readers would never know why there's an emerging consensus around nationalization from this article. That Time could not find someone who could explain the nuances of these issues is disheartening but not surprising. After all, it's much easier to write a contrarian piece about the dangers of the government running the banks than it is to actually learn about the topic and try to inform readers about what's being proposed, and what this potential plan's prospects for turning around the economy would be. Perhaps it's time we nationalized the media, and replaced our feckless and mindless Fourth Estate with people who will actually ask tough questions, and treat their jobs as a public trust rather than a game.