Nouriel Roubini is interviewed by the WSJ today and makes a compelling case for nationalizing the banks as "THE Market friendly solution" to our banking crisis.
Roubini also makes a bold prediction on what the Obama team will do.
http://online.wsj.com/...
FYI, expect to hear the word "receivership" instead of nationalization since "nationalization" is the other "N" word.
When Nouriel Roubini speaks economists listen for he was the first to predict this "Great Recession" that we are in (he calls it a "near Depression"). And lately what he has been saying is being taken seriously and is becoming conventional wisdom.
Only a few weeks ago, a free market economist such as Roubini talking about nationalization would have been heresy.
The man has instant impact on public debate. An idea he floated only last week -- that our "zombie banks" be temporarily nationalized -- aired first on Forbes.com, where he writes a weekly column. It has evolved, in the space of just a few days, from radical solution to almost received wisdom.
Last Sunday on ABC, George Stephanopoulos asked Lindsey Graham, the conservative Republican senator, what he thought about all this talk of bank nationalization. Mr. Graham said that he wouldn't take the idea off the table. And on Wednesday, Alan Greenspan told the Financial Times that "it may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring."
Left leaning economists have been talking about nationalization of the banks for months around the time when the first bailout was being debated but it wasn't until Roubini got into the act that economists on the right began taking this concept more seriously.
One of the reasons why conservatives such as Senator Graham and Alan Greenspan are embracing this concept is because it actually is far more appealing to fiscal conservatives than shelling out trillions to bailout these banks which will end up massively increasing our national debt.
Mr. Roubini tells me that bank nationalization "is something the partisans would have regarded as anathema a few weeks ago. But when I and others put it in the context of the Swedish approach [of the 1990s] -- i.e. you take banks over, you clean them up, and you sell them in rapid order to the private sector -- it's clear that it's temporary. No one's in favor of a permanent government takeover of the financial system."
There's another reason why the concept should appeal to (fiscal) conservatives, he explains. "The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks."
Although the Obama administration is fighting it and Geithner/Summers continues to insists that they prefer a private banking system, even they have acknowledge in today's WaPo article that they are open to nationalizing some of the insolvent banks but have ruled out nationalizing a large number of banks.
http://www.washingtonpost.com/...
But sources familiar with the thinking of Obama's senior advisers say they remain open to nationalizing selected banks as a last resort. What has been ruled out is the nationalization of a large number of banks. Treasury officials also are continuing to develop a plan to use public and private funds to offer help tailored to other large banks.
Roubini makes a bold prediction about what the Obama administration will end up doing in the next 6 months.
So, will the highest level of government be receptive to the bank-nationalization idea? "I think it will," Mr. Roubini says, unhesitatingly. "People like Graham and Greenspan have already given their explicit blessing. This gives Obama cover." And how long will it be before the administration goes in formally for nationalization? "I think that we're going to see the policy adopted in the next few months . . . in six months or so."
That long? I ask. "Six months from now," he replies, "even firms that today look solvent are going to look insolvent. Most of the major banks -- almost all of them -- are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness.
Roubini gives another reason why nationalization of the banks is a good idea besides being the most market friendly.
Yet another reason why bank nationalization is a good idea, Mr. Roubini continues, is that "we started with banks that were too big to fail, but what has happened, in the process, is that these banks have become even-bigger-to-fail. J.P. Morgan took over Bear Stearns and WaMu. BofA took over Countrywide and then Merrill. Wells Fargo took over Wachovia. It doesn't work! You can't take two zombie banks, put them together, and make a strong bank. It's like having two drunks trying to keep each other standing.
"So if you took over a big bank, and you split the assets in three or four pieces, maybe you create three or four regional or national banks, and they're stronger! Nationalization -- or 'temporary receivership,' if you like, if the N-word is a political liability -- is an occasion to undo the sort of consolidation that has created an even bigger systemic problem. And the only way to do it is by essentially taking them over and breaking them up."
Well the Obama administration will be doing the first step in determining which banks are solvent. Starting this Wednesday they will be unveiling their plan on how to do just that. They will be doing the "stress testing" on 18 of the largest banks (see WaPo article). The Stock Market knows that and that's why stocks continue to slide because the banking stocks are tanking which pulls the whole market down. Banking shares are being traded at a record low because the banks fear nationalization. It is becoming a self-fulfiling prophecy.
In all, Roubini predicts that in 6 months our banking system will be nationalized temporarily and our economy will be better for it.
Let's see if Roubini will get another bold prediction right...