The financial crisis is so complex and intractable that no one knows what to do about it. Get eleven economists together and get eleven different opinions. Right?
Well, no, not really.
You wouldn't know this from reading or watching the MSM, but among economists who've been right about most things over the last few years, there's virtual consensus. The "only answer" ( in the words in Joseph Stiglitz), "the obvious answer" (in the words of Dean Baker) is to nationalize the banks. While these leading economists might differ in the specifics, they agree that we need some form of government ownership.
Here's Nobel Prize winner Joseph Stiglitz
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.
Here's Nobel Prize winner Paul Krugman
But bank stocks are worth so little these days — Citigroup and Bank of America have a combined market value of only $52 billion — that the ownership wouldn’t be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.
My response to this prospect is: so? If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.
Here's Nouriel Roubini, who predicted the crisis in 2006.
“You have to eventually nationalize U.S. banks, you have to take the problem by the horns,” Roubini told Bloomberg Television in Davos today. “In my view actually most of the U.S. banking system is insolvent.”
Here's iconoclastic financial analyst Nassim Nicholas Taleb
Bank nationalizations are “absolutely necessary” to stop them damaging the financial system further with more losses, said Nassim Nicholas Taleb, author of the best-selling finance book “The Black Swan.”
“You cannot trust the banks in taking risks,” Taleb said in an interview with Bloomberg Television in Davos. “We have a very strange situation in which it’s the worst of capitalism and socialism, a situation in which profits were privatized and losses were socialized. We taxpayers have the worst.”
Here's the Center for Economic and Policy Research's Dean Baker
The idea that we would give one more penny to this crew that has wrecked the economy should make taxpayers furious. There is a legitimate public interest in keeping the banks operating; a modern economy needs a well-operating financial system. But, there is zero public interest in rewarding shareholders and overpaid banks executives.
These executives bankrupted their banks and brought the economy down with them. They belong in an unemployment line not collecting multi-million dollar paychecks in their designer office suites.
The obvious answer is to take over the insolvent banks, just as we did with the insolvent S&Ls. The government should form an RTC as we did in the 80s, which would dispose of the assets over time, collecting as much money as possible for the government. The bankrupt banks would be restructured and sold back to the private sector as soon as their books were straightened out. The point of the exercise is not have the government run the banks, the point is to keep the financial system running without giving even more money to the richest people in the country.
Unfortunately, none of these economists works for the Obama administration, which has rejected nationalization for ideological reasons:
Explicit nationalization of financial companies has little support among key Obama officials, sources said. Treasury Secretary Timothy F. Geithner and top White House economic adviser Lawrence Summers think governments make poor bank managers and cannot efficiently manage a vast number of institutions, according to some of their associates.
Poor bank managers compared to whom? The banks right now are essentially bankrupt; obviously the current managers could have done a wee bit better.
"We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."
Yet right now American taxpayers are majority shareholders in many banks. What we don't have is control.
Obama seems to have settled of a plan that try to get wealthy private investors to buy toxic assets by using taxpayer money to protect them from risk.
The plan, I fear, won't work. And Obama is underestimating how poorly it will go over. Here's Josh Marshall:
What's as troubling as the big rip-off of taxpayer money is that what Obama's attempting on the side of rebuilding the real economy could founder on the public backlash against what looks like a very misguided way to get a handle on the banking crisis.