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Decoder: Nationalizing banks

A bank sign

TEXT OF STORY

KAI RYSSDAL: On that topic of government mandates, perhaps you've heard all the talk over the past week or so... That maybe the best way out of this whole mess the banking industry's in is to have one, really big government mandate. That maybe what we really ought to do is nationalize at least some of them. That's a big, scary word for a lot of people -- both economically and politically.

So we asked our Senior Business Correspondent Bob Moon what nationalization might actually mean for this installment of the Marketplace Decoder.


BOB MOON: There's an old joke about the 10 scariest words in America: "Hi, we're from the government and we're here to help." Can you imagine your corner bank branch run by the same outfit that brings you customer service from, say, the Post Office?

James Barth is a finance professor at Auburn University. He says that's what nationalization would mean.

JAMES BARTH: Nationalization, in its basic form, the government actually takes over the banks. It not only eliminates the existing shareholders in the banks, controls the banks, but actually runs the banks. You would have to have people, probably seeing government employees, actually running the banks.

Not everyone thinks Uncle Sam would be that heavy-handed. Bert Ely is a leading banking industry consultant.

BERT ELY: The government would appoint possibly new directors, replace some of the top management of the bank, and then the bank would continue to function as if it was a private entity, but under government ownership and control.

The government could then force the banks to start freeing up credit and lend more. But some experts worry that politicians could end up dictating who gets loans. Simon Johnson is an economist at the Peterson Institute for International Economics.

SIMON JOHNSON: Some of the ideas out there about, "Oh, you should have more credit going to this sector or to that sector or to small business, for example. Those are actually potentially dangerous, because then you get political influence over credit, and all kinds of bad, crazy lending decisions -- more bad, crazy lending decisions -- could be made.

But Johnson thinks the government could also force some healthy changes.

JOHNSON: I think you would probably break up these banks. You might actually make them more bottom-line oriented, more profit-oriented -- as in profits for the shareholders, as opposed to bonuses for the top dogs.

Whether or not the government moves to nationalize the banks, Auburn Professor James Barth points out customer deposits would still be insured by the government. And even if it does happen, he's convinced it wouldn't last long.

BARTH: I don't think anybody's talking about permanent nationalization, but a temporary way in which to get the banks back on a more financially sound footing, and a way in which to instill confidence in our banking system or general financial system.

In Los Angeles, I'm Bob Moon for Marketplace.

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