Nationalization Revisited
| Sun Jan. 18, 2009 2:28 PM PST
NATIONALIZATION REVISITED....Steve Waldman takes issue today with my contention that Sweden didn't actually nationalize very much of its banking industry during its credit crisis of the early 90s, and his rebuttal is worth a read. In the end, though, it turns out that we don't actually disagree about that much. We both agree that Gota was nationalized, and we both agree that Nordbanken was bailed out. However, we disagree a bit about whether Nordbanken was a "state bank." This is something of a judgment call: since the Swedish government was the majority owner, I think that's a fair description, but Waldman points out that it was publicly traded and "not actively controlled by the state prior to the nationalization." Fair enough. It's also a judgment call whether this was really a nationalization. If the state goes from majority ownership to full ownership, is that nationalization?
To some extent this is splitting hairs, of course, and you get into some of the same issues in the U.S. Fannie Mae and Freddie Mac, for example, have plainly been nationalized, but how about AIG? For some reason no one wants to call it nationalization, but what else should you call it when the feds own 80% of the company? But semantic arguments to one side, there's also this:
Nordbanken alone had an asset base of 23% of GDP. To put that in perspective, in US terms that's almost as large as Citi and Bank of America. (Citi and Bank of America together had an asset base of 26% of US GDP at the end of 2007.)
Again, fair point. It's one thing to say that "only" two banks were taken over, but if those two banks account for a third of your banking system, then you've nationalized quite a bit even if a big chunk of that third was state-owned in the first place.
Anyway, read the whole thing. Just to be clear, I'm not trying to make any kind of bulletproof argument against nationalization, only trying to point out that the story is more complicated than it's sometimes made out to be. Sweden did some nationalization, but it was the systemic banking guarantee in late 1992 that formed their biggest policy response to the crisis.
FWIW, I think it's wise to be wary of nationalization. It should be a last resort, and I've gotten a sense recently that a lot of people are talking about it awfully casually. Still, it's true that there are some benefits to nationalization, and one of them is that it allows us to avoid the problem of valuing and buying up toxic assets from troubled banks. If the government owns the whole bank, then the bad stuff can be easily hived off without any kind of valuation at all, and then left to sit for a while before it's sold off — which is what the Swedes did.
If we have to nationalize, then we have to nationalize. But we should understand the precedents before we do, and go ahead only if we have to. No stampedes, please.
Continues Below
Continued From Above
Comments
Haven't we deliberately been muddying the waters, by buying special nonvoting shares. Also nationalization with intent to privatize once the market/economy/financial-system recovers isn't the same as nationalization with intent to forward run it in the name of the people.
Still, it's true that there are some benefits to nationalization, and one of them is that it allows us to avoid the problem of valuing and buying up toxic assets from troubled banks.
No, the real advantage is that a nationalized bank wouldn't own toxic assets in the first place.
Submitted by Kevin Drum on Sun Jan. 18, 2009 3:14 PM PST.
Econobuzz: What makes you think that? Nordbanken was majority owned by the Swedish government and they owned more toxic waste than anyone. State banks are in no way immune from doing stupid things.
Agreed, the takeover of a bank into public ownership should only be the ultimate measure to solve a banks problem. However, if there is no other backstop available to a bank than the injection of taxpayer money and the amount needed by far exceeds the market valuation of the bank, then a public takeover should be the default option.
I also agree with bigTom, without the intent of taking permanent control, such a takeover is not the same as nationalization. What about using the term 'temporary takeover' instead? Looks like a more accurate description anyway and possibly also makes it more palatable.
State banks are in no way immune from doing stupid things.
Point taken. But, going forward, I think it might be a little easier to control the loans made and assets acquired by a national bank.
To reiterate a point I made in a previous thread, the money creating function of commercial banks that results from lending your dollar of deposit to ten borrowers -- or buying of ten dollars of debt instruments -- should be nationalized. There is no good reason to allow institutions that can create money with your deposit to invest in risky assets in order to maximize their profits. Nationalizing this function has no downside.
The discussion that is taking place -- to nationalize banks or not -- is not informed by the fact that banks are unique in that they create money. Other entities and industries do not create money. It's that function that should be nationalized, not the investing function.
The argument that a bank that holds your deposits should be able to create money by investing just like any other entity -- e.g., investment bank, hedge fund, etc. -- in riskier assets is what has led to the current banking crisis.
Put another way, the worst part of the speculative bubble -- and its consequences for the economy -- is that banks that held the deposits of the American public were also heavily involved.
We know what kinds of loans and investments are safe, that is, which kinds have reasonable and manageable default/failure rates. Banks that hold your deposits should ONLY hold those kinds of assets.
Other institutions in the private sector should take higher risk -- and "innovate" -- with THEIR OWN or investor funds. They should not be nationalized but, of course, need to be regulated to ensure transparency and accountability.
I think if we called it "receivership" people would be less afraid of it. The basic issue is what to do with an insolvent (i.e. bankrupt) bank. The Bush solution has been to give them free money. Someone who actually believed in free markets and/or protecting taxpayers would not do that. Before the taxpayers pour money in, let the investors absorb the losses. As Waldman points out, another key part of the "Nordic Model" was forcing banks to fully mark these assets down instead of doing it drip-drip quarter by quarter. That allows us to get this crisis over with rather than suffering a Japanese-style "lost decade" of zombie banks, ZIRP, and on-again off-again recession.
For a man who compared not voting for TARP to 9/11, you seem awfully hesitant to take the bold steps necessary to actually resolve this crisis. It's time for the banks to lay their cards on the table and for investors to take their losses like men.
Kevin and every one else miss the most important points.
First, from the perspective of national goals, the American financial and banking system has been a dismal failure, with real industries, most particularly capital goods, and public infrastructure, STARVED for funds for almost three decades now. Instead, the financial and banking system has supported ever increasing debt, and ever more complex derivatives based on that debt, none of which has done an iota of good for the real economy.
The major result has been that the United States has been unable to make any progress what so ever in ending its dependence on imported energy sources. In fact, the U.S. has been moving backwards, becoming MORE dependent on imported energy sources.
Nationalizing the financial and banking system would allow us, as a society, to channel flows of investment and credit to entrepreneurs and companies that are actually working toward new, domestic sources of renewable energy. In other words, the financial and banking system must become a regulated public utility.
Second, what no one has yet discussed is the cultural problem of entire generations of Wall Streeters who have been indoctrinated in the mores, norms, and values of financial capitalism, rather than industrial capitalism. This makes them, by nature, hostile to and intolerant of real industries, most particularly capital goods, public infrastructure, social investing, and the development of the actual source of all wealth, human capital. As James Crotty has shown, the percentage of cash flow that non-financial companies have had to pay to the financial and banking system has nearly tripled since the 1960s. This mal-appropriation of non-financial companies' cash flow is the basic causal factor in the decline of working class earnings, the destruction of job security and the erosion of health and retirement benefits, and the development of a portfolio mentality of industrial assets that makes it impossible to provide the long-term nurturing an industrial enterprise requires.
Another reflection of this cultural problem is that for many of the past years, the amount of just BONUSES given out on Wall Street was MORE than the total wage gains of nearly 100 million Americans for FIVE years. This is how the rich have stolen from the poor. Depending on Wall Streeters to manage an industrial renaissance is tantamount to asking an arsonist to manage a local fire department.
The complete disutility of the present financial and banking arrangements for helping meet the needs of the common good is strongly indicated in the recent GAO report on offshore tax havens. Going through the list, one is struck by how many subsidiaries financial companies such as Goldman Sachs and Citigroup have established in offshore tax havens compared to many other large companies, like WalMart, which has none.
Wall Street and predatory financial capitalism must be destroyed if the United States is to survive. It's either a return to industrial capitalism, or the usury and speculation of financial capitalism will bankrupt and destroy the citizens and the country.
The Swedish state owned 70 percent of Nordbanken before the crisis. In the beggining of the crisis there was a capital infusion by both the state and the private owners which led the ownership of the state to rise to 77%. When the crisis become even more acute the private owners were bought out in order to speed up the reconstruction. It was then effectively nationalized.
What if...
A person's religious affiliation and/or political affiliation could affect his/her credit score (say, 50 points, secretly)? Wouldn't some people be granted more power and wealth than those not so fortunate to be part of the 'in' group?
Aren't the exact formulas used by the big three credit rating services secret?
Wouldn't the effect be the same as 'redlining' on steroids?
Since credit ratings are essentially public information, statistics could be used to show if there is political and/or religious bias in credit ratings.
Submitted by The Lounsbury (not verified) on Mon Jan. 19, 2009 6:36 AM PST.
First, Drum is entirely correct and in keeping with how we in the financial world would label the Swedish bank. A significant state stake makes it a state bank, even if one qualifies that by saying "essentially managed on a market basis." Or some such.
As for comments about State Banks being easier to control, quite the contrary. Empirical evidence shows rather strongly that State banks are HARDER to control and tend to blow up more frequently. Politicised or populist lending being major typical causes. Credit risk all by itself is not an easy thing to manage.
State ownership, with all the non-business, populist "but we own so it should behave more idiotically because easy credit is popular short term sugar rush..." pressure, is almost universally a long term disaster.
Far better to excercise arms-length control - and watch carefully agency issues. The Greenspan Fantasy that somehow self-interest made securitisation magically work w/o gatekeeping and regulatory oversight was based on excessive academic abstraction. Securitisation is in fact a wonderful power tool, but like any power tool, used badly can bloody well take off your fucking hand.
The US needs Regulatory Simplification - the insanity of having more regulators than... well I can't even bloody count them drives half of your problems in gatekeeping and effective oversight. Even if say Fed does its job wonderfully, as you just learned, leakages in underregulated areas, in State (provincial) regulation, etc. can let in all kinds of nastiness that can blow the system up.
Recap your banks, absolutely, probably need to have a force majeur sale of bad assets to a Resolution Trust type entity, etc. But fucking get your crazed, byzantine and balkanized regulatory oversight system nationalised and simplified for fuck's sake.
Paul Krugman on nationalization and the Bad Bank.
Submitted by The Lounsbury (not verified) on Mon Jan. 19, 2009 6:41 AM PST.
This is the hallmark of a comment by someone who knows nothing: First, from the perspective of national goals, the American financial and banking system has been a dismal failure, with real industries, most particularly capital goods, and public infrastructure, STARVED for funds for almost three decades now. Instead, the financial and banking system has supported ever increasing debt, and ever more complex derivatives based on that debt, none of which has done an iota of good for the real economy.:
Public infrastructure is a public financing decision, not a banking decision. It is queer to talk about the financial system drowning the country in debt and then talk about not financing. The two statements are self-contradictory. In any case, empirically, capital investment in the private sector in the United States has benefited enormously from financial innovation that has drastically lowered the cost of money (borrowing) for all classes of borrowers, and in the corporote / private investment area, dramatically so.
Lack of low cost funding, even for extremely risk ventures is not an issue in the United States (certainly not in international terms compared to most economies), although of course part of that low cost has been Asia subsidising the dollar, but... that's not the US financial system as such.
I am still of the opinion that the easiest way out of all our problems is to follow Russia's lead and Nationalize Big Oil and all the other Energy Companies-We won't have to worry about our trade balance as the profits from Big Oil will be going into the Treasury and we can always lower our prices and tap our reserves if the oil costs get out of hand-We can also control Natural Gas Prices. On the plus side for Big Oil, they won't have to worry about drilling sites or refineries as that will all be covered-God, I am a genius!
I don`t think
Submitted by buying steroids (not verified) on Thu Apr. 30, 2009 4:17 AM PDT.
I don`t think nationalization is a solution to the bank problems some countries encounter. As well as globalization, it`s has nothing good to offer to us, and behind all "good" moves the government is doing there are many other hidden things.
