Steve Randy Waldman writes the blog interfluidity. His take is usually away from the mainstream, and always interesting.

His most recent discussion on Bank Nationalization is quite interesting


It will come to no surprise of readers of this blog that I favor nationalization of failed, systemically important banks. But James Surowiecki and Floyd Norris have a point. We absolutely should not nationalize as a means of persuading banks to issue credit more freely. If the government (idiotically) wants looser lending than banks are willing to provide, it oughtn’t take their money and lend it. The government can lend its own damned money (well, our own damned money) if it thinks that profitable loans are not being made, or that for the good of the economy unprofitable loans must be made.

The reason to nationalize a bank is because the bank has failed and its former owners have no legitimate claim to its assets. The government has been forced to offer support with public money, thereby purchasing the corpse fair and square. We take the bank into public ownership because taxpayers who have been conscripted to accept extraordinary losses are entitled to whatever gains follow the reorganization they finance.

When a bank is nationalized, shareholder equity should be written to zero, and existing management should be handled as roughly as the law allows. If we have a bit of courage, we should impose haircuts or debt-to-equity conversions on unsecured creditors, but I don’t think we have that kind of courage. “Toxic” assets should be revalued at pennies-on-the-dollar market bids or else written to zero and hived into “bad banks”. Once we have a conservative valuation of the assets and know exactly what is owed, we’ll know how much public money would be required to cobble a robustly funded bank from the wreckage. However, if we recapitalize “too big to fail” banks without restructuring them, we will quite deserve our next mugging. We had better cut these monsters into little, itty, bitty pieces. We should embed strict size and leverage limits into their itty, bitty charters, restrict their ability to recombine, and then hire management to run the little things on strictly commercial terms. Hopefully we will change what it means for a bank to run on commercial terms — We should create a tax and regulatory structure that penalizes scale and leverage across the board. Better yet we should decouple the payment system from risk investment by reorganizing banking functions into “narrow banks” and credibly not-guaranteed investment vehicles. But whatever the banking industry comes to look like, nationalized banks should be recapitalized once, then managed to compete in it, and for no other purpose. Taxpayers should seek to extract maximum value from their eventual privatization. But should any of the reorganized banks seek a second helping of at the public trough, they should be ostentatiously permitted to fail. Rather than an implicit government guarantee, successors of nationalized banks should face a particularly itchy trigger finger.

Having nationalized “banks” make loans that prudent managers of a well-capitalized bank would not make is just a way of obscuring a subsidy and guaranteeing permanent quasipublic status by requiring on-going guarantees, bail-outs, and capital injections. Further, putting easy-lending public banks in competition with ordinary thrifts would resuscitate the destructive dynamic we have just put behind us, wherein bank managers must match the idiocy of their most foolish counterparts or watch their businesses wither.

If we want to stimulate the economy, put idle resources to work, stoke animal spirits, whatever, we should do that with some combination of transfers, investment subsidies, inflation, and public works. But if we are dumb enough to force-feed credit into the economy, let’s not hide that behind a bunch of puppet banks. And let’s keep it very clear that we are not confiscating private firms in order to make them tools of the state. We nationalize reluctantly, when we have had no choice but to inject public money (or guarantee assets, which amounts to the same thing) in banks that otherwise would have failed. We nationalize because, in a capitalist economy, investors get to keep the profits they endow, even when the investors happen to be taxpayers.

Some nationalization links

Steve Randy Waldman — Tuesday January 20, 2009 at 12:16pm

Category: Bailouts, BP Cafe, Credit, Finance

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “Nationalize Like Real Capitalists”

  1. Mike in Nola says:

    I didn’t know Gaius Marius was still alive? :)

    Of course all this is too obvious and sensible to happen. It’s as free market as you can get without letting failed banks just collapse as they would do without intervention. Instead, we will just keep feeding the zombies our flesh until there is a revolt from taxpayers who don’t like being devoured.

  2. Greg0658 says:

    from the primary post – However, if we recapitalize “too big to fail” banks without restructuring them, we will quite deserve our next mugging. We had better cut these monsters into little, itty, bitty pieces ….. Hopefully we will change what it means for a bank to run on commercial terms ….. nationalized banks should be recapitalized once, then managed to compete in it ….. Taxpayers should seek to extract maximum value

    me now – Ive been on “to big to fight” myself

    but the butt is how do you make sure the “maybe last go around” isn’t to setup and to send (from HealthSouth CNBC special last night) “the Family” into a lavish retirement?

    and KISS cause I’m tired (oh can’t say that – defeat’g to this post) and have another life (well … I do)

  3. Mike in Nola says:

    Here’s someone who disagrees:

    Amazing that he still has a job. Shows that markets really aren’t efficient.

  4. Brendan says:

    The author talks about chopping the banks into bitty pieces, but obviously there are advantages to these giant institutions. While I personally prefer the already tiny credit union, they’re not for everyone or for virtually any business. For the large institutions themselves, these advantages include things like economies of scale and the ability for one branch to seamlessly work with another. For their clients, things like the ability to use the same bank across state lines and for large clients to work with a single entity (it’s hard to get a $5M corporate loan, much less two loans in different states for an expansion project, at your local credit union). On the other hand, the downfalls are painfully obvious right now.

    This makes me wonder if a system more like the airlines have makes sense: instead of your One-World Alliance you have your Bank of America Alliance. Or perhaps more of a franchise system would be appropriate. One where B of A Washington can work cooperatively with B of A Florida, but are completely different entities under completely different management. That way if B of A Florida makes some stupid loans for a developer to build more condos in Miami, they’re small enough to fail. The right restrictions need to be put in place to keep lending between the institutions in check, such that they don’t act as a single entity anyway. At the same time, as a corporate customer is both Washington and Florida, my company can be served under a single umbrella. As we’ve seen, the stick approach doesn’t work (no bank CEO’s in jail that I know of and we’re back down to a handful of oil and telecom companies after splitting them up), so perhaps a carrot approach is more apt to work. This could be something along the line of FDIC insurance and Fed borrowing rates go up exponentially with size witch also takes into account how much lending there is between “franchises.” Banks can self-regulate their size based on the pros and cons of getting large. It’s not flawless, but certainly better than what we have now.

  5. Brendan says:

    Damn trigger finger…can’t…edit…post… Which witch is the right which?

  6. batmando says:

    Added benefit to nationalization… once publicly owned, all (most? a lot?) of the dirty linen can be found, aired and perp walks en masse ensue?

  7. Pat G. says:

    Nah.. Reorganize under bankruptcy.