The massacre in financial markets and among financial firms is continuing. The debate on “bank nationalization” is borderline surreal: with the U.S. government having already committed – between guarantees, investment, recapitalization, liquidity provision – about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure). Thus, the U.S. financial system is de-facto nationalized as the Fed has become the lender of first and only resort rather than the lender of last resort and the Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure rather than only de facto. Check out: “The Rising Risks of a Global L-Shaped Near Depression and Stag-Deflation” and “The L Curve - Latest Roubini Op-ed In the New York Times”
According to Nouriel fully nationalizing Citi and Bank of America would be better. Full nationalizations (vs. the current partial, piecemeal effort) would be better for the market and the economy because it's the first step in the process of cleaning up "bad" banks so they can later be sold back to private investors, i.e. "re-privatized", as was the case last year with IndyMac. Don’t miss “Latest Roubini Interview on CNBC” and “Latest Roubini Interviews On CNBC and on Bloomberg”.
Amen to all that. What most commentary indeed misses is that the nationalization has already happened! And (pssst folks on CNBC!) it's not because Obama's a closet commie or Francophile or socialist. Most of the 'defacto' nationalization took place under the Bush administration. Shall we review a few rather large government interventions/nationalizations courtesy of those noted defenders of unfettered capitalism?
- Fannie/Freddie (~$350B, and counting, endlessly)
- AIG (ditto x 2)
- TARP ($700B, and only part I)
- TLF #1 (~$2Trillion in guarantees)
- Direct purchases by the Treasury (to the tune of $800B) of MBSs - this is why mortgage rates declined late last year
- Engineering the Merrill deal (gee, thanks!), the Wachovia deal, the Nat City, the WAMU, the Countrywide deal, etc....
Not, to be sure, that all these interventions were awful, or completely ill-considered. Au contraire! Actually, the biggest problem has been their ad-hocness and timidity. And if anything, Team Obama is suffering from the same hesitation. What we desperately need ASAP is a galloping, full-bore, balls-to-the-wall nationalization in order to preserve what little is left of our financial system before our trusty bank leaders (the same folks who drove us over the cliff) kill it completely. Ask yourself - would you want Ken Lewis running things, and accountable to almost no one but his greedy traders, or a faceless bureaucrat who's accountable to the Administration, and hence the voters?
Here's Krugman this morning: Krugman: The Big Dither
Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.”
Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern....
Why is this?, he asks:
The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.
But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.
Indeed, the health of the banking system is much WTYTII.
Tom Friedman has gotten around to figuring this out: Obama’s Ball and Chain
....do you know what I fear? I fear that his whole first term could be eaten by Citigroup, A.I.G., Bank of America, Merrill Lynch, and the whole housing/subprime credit bubble we inflated these past 20 years.
I hope my fears are exaggerated. But ask yourself this: Why couldn’t former Treasury Secretary Hank Paulson solve this problem? And why does it seem as though his successor, Tim Geithner, won’t even look us in the eye and spell out his strategy? Is it because they don’t get it? No. It is because they know — like Roy Scheider in the movie “Jaws,” when he first saw the great white shark — that “we’re gonna need a bigger boat,” and they’re too afraid to tell us just how big.
Yup. The bankers (and now, the Feds) know for sure the epic magnitude of the disaster we face and which they created, but are afraid to admit it. They seem to cling to hope something will save us - China will do a massive stimulus, the US consumer starts spending again, toxic assets are actually worth close to book value, Europe gets its act together, there's divine intervention... - hope that is not at all well-founded, to put it mildly. At its very worst, these folks hope to STILL enrich themselves as if nothing has changed, but this time around enrich themselves with taxpayer money...
Look out populist rage! http://www.buzzfeed.com/akdobbins/jon-stewart-skewers-cnbc
And as Roubini pointed out above, we're already in this to the tune of $9TRILLION in guarantees, loans and backing committed so far. Nationalization is here folks, just not enough of it thus far. At this moment, in this crisis, the more nationalization the better. Being called bad names by folks who are unaware of the urgency here should not preclude Obama from doing the right thing, and the only thing.
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