Banks: Time for Permanent Nationalization?
Continued from previous page
These "bonds-to-stocks" swaps (often called "debt-to-equity" swaps), or partial write-downs if the bondholders so choose, are a crucial aspect of an equitable nationalization of banks. The bondholders lent their money and signed contracts that stipulated that if the banks went bankrupt, they might suffer losses. Now the banks are bankrupt and the bondholders should take the losses.
This process of accelerated bankruptcy and nationalization should be applied in the future to any banks that are in danger of bankruptcy and are deemed to be "systemically significant." This would include the next crises at Citigroup and Bank of America. Other banks in danger of bankruptcy that are not "systemically significant" should be allowed to fail. There should be no more bailouts of the bondholders at the expense of taxpayers. In addition, the banks who received some of the first $350 billion should be subject to stricter conditions along the lines that Congress attached to the second $350 billion -- that banks should be required to increase their lending to businesses and consumers, to fully account for how they have spent the government capital, and to follow strict limitations on executive compensation. The government should withdraw its capital from any banks that fail to meet these standards.
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.