Stop Rearranging Deck Chairs on the Titanic and Nationalize the Damn Banks

By Joshua Holland, AlterNet. Posted January 30, 2009.

How would it work? The government would put teetering institutions deemed too big to fail under trusteeship. Many among the current management teams would join the ranks of the unemployed, shareholders would get wiped out -- an important piece of tough love that might dissuade people from following the herd into the next speculation-fueled bubble.

And then the government would liquidate the institutions' assets in an orderly, gradual way. Then, finally, it would sell back smaller, leaner institutions -- without the burden of piles of bad paper on their books -- to the private sector at a later date. 

Proponents of the plan argue that taxpayers might even see a profit from the transaction, but that's far from a given. The reality is that while it's probably the least bad plan, and would likely result in the lowest ultimate cost to the taxpayer, a similar approach, but far smaller in scope, was used in the 1980s to bail out the savings and loans and ended up costing taxpayers $150 billion.

Perhaps the best rationale for nationalization is that the bursting bubble that precipitated this crisis wasn't in tech stocks or commodities -- it was a bubble built largely on people's homes. The New York Times, which continues to ignore the underlying collapse of the housing bubble, notes that one of the flaws in the plan is that "if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures." 

But what they call a bug is obviously a feature of nationalization. The foreclosure crisis is spreading, and foreclosed properties fuel a vicious cycle, dragging down real estate prices in the areas where they're concentrated, which in turn puts more homeowners "under water" -- owing more on the mortgage than their houses are worth -- which in turn increases the number of foreclosures.

If the banks were nationalized, the government could declare a moratorium on foreclosures for the properties it controls, and move to restructure mortgages -- perhaps at subsidized rates -- for homeowners on the bubble. 

This is an important part of the puzzle. So far, government efforts to bailout homeowners have had little success, in large part because privately held institutions have an obligation to their shareholders to avoid writing down the principle of loans made on assets whose values have tanked.

So far, all of the government's attempts to bailout homeowners have been structured as voluntary programs, and the terms that the banks require before deciding to bite have been too costly for most distressed homeowners to afford. 

It appears that the idea of nationalization is gaining steam in policy circles, but the Obama administration has been hesitant to use the word, perhaps wary of the reaction the proposal might get from conservatives.

The New York Times reports, "President Obama's top aides have steered clear of the word entirely," and the Washington Post notes, "Administration officials are … trying to offer federal assistance to financial firms without nationalizing them outright, according to a source who has been in contact with senior Treasury officials." Obama's Treasury Secretary, Tim Geithner, told Congress, "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." But they may not end up with much of a choice. The Post adds: "The problem is the price of banks shares is so low now that a major investment of taxpayer money [in a recapitalization effort] would leave the government with a majority ownership stake." 

Barack Obama has promised a pragmatic approach to the crises facing the country. Nationalizing big, failing banks may smack of "statism," but the consequences of tinkering around the edges of the crisis are simply too dire; we've got to leave all options on the table.

See more stories tagged with: financial crisis

Joshua Holland is an AlterNet staff writer.

Liked this story? Get top stories in your inbox each week from AlterNet! Sign up now »