Nationalizing Cancer

Nationalizing the banks, at this point, is like nationalizing cancer. Nevertheless, it’s looking more and more like it needs to be done, at least with some of them. How would it work?
Like this. The government buys the ailing bank loaded down with the toxic subprime garbage loans. The government then splits the bank into two different banks, Good Bank and Bad Bank. All of the garbage loans are unloaded onto Bad Bank, which is allowed to fail. The remains of the institution are in Good Bank, which is presumably a reasonably solvent institution by now. At the point at which Good Bank is ready to fly again, it can be reprivatized.
Bank nationalization has been done in many Western countries in recent years, with generally positive results. Who hates it? Capitalists and especially bankers. Stockholders do get creamed, it’s true. Once the government takes over the bank, the remaining stockholders are all wiped out. But who cares what the capitalists think? Who cares what the bankers in particular think. This is the scum that got us into this mess in the first place.
Another big resistance to bank nationalization is that in the US this is seen as “socialism.” Despite the fact that we have many socialist aspects our economy, capitalist propaganda has pummeled away at Americans for many decades with S-word to the point where many, possibly most, Americans think socialism is the most evil thing on Earth.
Unfortunately, this includes a lot of Democrats. Democrats are not so much afraid of the S-word in and of itself as they are afraid of being called socialists by the capitalists and their party, the Republicans. Nevertheless, the radical right S-word crowd took a serious pummeling in this last election and they may not be electable for some time, if ever. If the Republicans want to win future elections, I think they need to move to the Left a bit or die.
Bank nationalization would be much better than Geithner’s “cash for trash” project using taxpayer money to buy up the garbage loans from the banks. On the very far Right, exemplified by the libertarians like Steve Sailer and Ron Paul, some very irresponsible folks are pushing the “nothing is too big to fail” line. I can’t emphasize strongly enough how irresponsible this is. If you can’t figure out why, just think about it. You think this economy is bad now, let those big banks crash down and see how you like the view from the ruins.

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8 thoughts on “Nationalizing Cancer”

  1. Bank nationalization has been done in many Western countries in recent years, with generally positive results. Who hates it? Capitalists and especially bankers.
    It’s probably more accurately called government managed receivership since they don’t take over banks that are healthy but banks that have screwed the pooch. The managers have demonstrated they are inept and the scale of the problem is so large, an even bigger entity has to step in. It’s my understanding that in many cases the banks are made private again when their books are cleaned up.

  2. Dear uncle Milton
    If a government takes over a failed bank, it assumes responsibility for the liabilities and becomes the owner of the assets. Since the liabilities exceed the assets, the state will incur a loss. Once the failed bank has been restored to health, the state sells it back to the private sector. If there is any money left, highly improbable in most cases, the shareholders will receive it. Nationalization is the right way to go because it insures that the money that the state will pour into the banks will go to the creditors of the banks, not the managers and shareholders. If a bank is healthy, the shareholders will not suffer.
    In the 90’s the Swedish government did just that. The total cost to the Swedish taxpayers was in the end only 1.5% of GDP. In the early 80’s the Chilean military dictatorship also nationalized the banking sector. The ultraliberal policies of the Pinochet government had caused a huge crisis, so they to threw their libertarian principles overboard and practiced some socialism. Chile has done relatively well since then because it was immunized against market worship by the disastrous results of the ultraliberalism that guided Chilean economic policy between 1973 and 1983.
    Libertarians are like Christian Scientists who believe that God cures disease but who will run to a doctor as soon as they get really sick.
    Regards. James

  3. Sailer is not libertarian, at least, he doesn’t say he is. He’s even been criticised by National Review types, like Ramesh Ponnuru, for being insufficiently pro-free market, being a ‘paleo’ or ‘Buchannite’ or whatever..
    Anyway, I agree with you that liquidation doesn’t seem wise at all. Robert Shiller, the economist — you know, the guy who was right on the stock boom, dotcom crash and the housing bubble from day one — also said we should save the banks, how awful it may be for us in the short term.
    If you’re interested in the ‘good bank’ concept, you check out Willem Buiter’s “Maverecon” blog at Financial Times. Just browse and check out the blogs on the topic, very interesting.

  4. To James Shipper:
    If a government takes over a failed bank, it assumes responsibility for the liabilities and becomes the owner of the assets. Since the liabilities exceed the assets, the state will incur a loss.
    No the state does not have to incur a loss. The only reason I could see for “nationalizing” a bank is that it’s about to file for bankruptcy. (Which I am sure would have happened already to Citigroup absent cash infusions from the US government..) In that regard the terms are the same basically as any bankruptcy.
    Liabilities are customer deposits, preferred shares, bonds, and any loans from other institutions. We already have examples with Fannie Mae and Freddie Mac as to what to happens to preferred shares. They basically go to zero. The government is in no way is obliged to honor at 100% of value shares, bonds, preferred shares, or outstanding loans. In the US it’s dealt with in the same way a bankruptcy is dealt with, share holders are dead last. The one group that is guaranteed to come out whole are depositors (at least up to $250,000) via the FDIC.
    As you may know the banking industry has had a major blowup once a decade for the past 30 years. Late 70s early 80s the Latin American debt crisis. Late 80s early 90s the S&L crisis and the one we have now. It’s a serial ripoff of the American people.

  5. Uncle Milton is correct. Once the govt takes over, the shareholders are cleaned out. They’re bigtime losers once that happens. That’s one of the reasons that these bank stocks are degenerating into penny stocks. With the rumors of takeovers, who wants to be left holding the bag?
    I am glad to see that Uncle Milton has a populist streak!

  6. Dear Robert and uncle Milton
    Shareholders are owners, not creditors. They have the assets, not the liabilities. The purpose of a takeover is not to protect the shareholders.
    If the government does not assume responsibility for the liabilities, it may as well not intervene and let the company go bankrupt.
    Regards. James

  7. To James Shipper:
    Shareholders are owners, not creditors. They have the assets, not the liabilities.
    Shareholders are creditors, if the bank wants to go private they have to be bought out. However they are lowest level of creditor.. in bankruptcy they almost always get wiped out.. preferred shares and bondholders get priority.
    They do not hold assets really… in regards to the view from the bank.. they have a highly liquid liability. Since the bank can not go private without paying off the shareholders.. it is a liability.
    The assets of the bank would be:
    Outstanding loans (which can include credit card debt, mortgages, commercial loans, building loans, etc) , any bonds of other entities that they hold, any stock of other entities that they hold, buildings in their possession, land in their possession.
    The liabilities of a bank are:
    Shares of stock (but a very low level liability which is typically wiped out in bankruptcy..) the banks preferred shares, the bank bonds (which can have various rankings) loans they have received from other banks or entities, customer deposits.
    If the government does not assume responsibility for the liabilities, it may as well not intervene and let the company go bankrupt.
    The reason a government would get involved in a bank’s bankruptcy (at least a large one..) is that it has a potential multiplier effect since the bank may owe large sums of money to other banks and bring other more healthy banks down in a bankruptcy or at least freeze lending for an extending period of time.

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