Banks: Time for Permanent Nationalization?

By Fred Moseley, Dollars and Sense. Posted March 3, 2009.

There is one other acceptable option: the government could create entirely new banks that would purchase good assets from banks and increase lending to credit-worth borrowers. These government banks are sometimes called "good banks," in contrast to the "bad bank" proposals that have been floated recently, according to which the government would set up a bank to purchase bad ("toxic") assets from banks. The term "good bank" is no doubt more politically acceptable than "government bank," but the meaning is the same. The only difference between the "good bank" proposal and the nationalization proposal I've outlined here is that my proposal would start with existing banks and turn them into government banks.

In recent weeks, there has been more and more talk about and even acceptance of the "nationalization" of banks. The Washington Post recently ran an op-ed by NYU economists Nouriel Roubini and Matthew Richardson entitled "Nationalize the Banks! We Are All Swedes Now," and New York Times business columnist Joe Nocera has written about how more and more economists and analysts are beginning to call for nationalization: "Nationalization. I just said it. The roof didn't cave in."

Even former Fed chair Alan Greenspan, whom many regard as one of the main architects of the current crisis, recently told the Financial Times that (temporary) nationalization may be the "least bad option": He added, "I understand that once in a hundred years this is what you do."

But there are three crucial differences between such pseudo-nationalizations and full-fledged, genuine nationalization:

• The pseudo-nationalizations are intended to be temporary. In this, they follow the model of the Swedish government, which temporarily nationalized some major banks in the early 1990s, and has subsequently almost entirely re-privatized them. Real nationalization would be permanent; if banks are "too big to fail", then they have to be public, to avoid more crises and unjust bailouts in the future.


• In pseudo-nationalizations, the government has little or no decision-making power in running the banks. In real nationalization, the government would have complete control over the banks, and would run the banks according to public policy objectives democratically decided.


• In pseudo-nationalizations, bondholders don't lose anything, and the loans owed by the banks to the bondholders are paid in full, in large part by taxpayers' money. In real nationalization, the bondholders would suffer their own losses, just as they reaped the profits by themselves in the good times, and the taxpayers would not pay for the losses.

In mid-February, Treasury Secretary Timothy Geithner announced the Obama administration's plans for the bank bailout -- renamed the "Financial Stability Plan." This plan is very similar to Paulson's two versions of TARP: it includes both purchases of high-risk mortgage-backed securities from banks and also investing capital in banks. The main new feature is that government capital is supposed to be invested together with private capital. But in order to attract private capital, the government will have to provide sufficient guarantees, so most of the risks will still fall on taxpayers. So Geithner's Financial Stability Plan has the same fundamental flaw as Paulson's TARP: it bails out the banks and their bondholders at the expense of taxpayers.

The public should demand that the Obama administration should cancel these plans for further bank bailouts and consider other options, including genuine, permanent nationalization. Permanent nationalization with bonds-to-stocks swaps for bondholders is the most equitable solution to the current banking crisis, and would provide a better basis for a more stable and public-oriented banking system in the future.

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Fred Moseley is a professor of economics at Mt. Holyoke College.

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