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Should the U.S. just nationalize banks?

Economics editor Chris Farrell

TEXT OF INTERVIEW

Scott Jagow: This hasn't been a good week for financial stocks. Investors are dumping bank shares left and right because they can't see a prosperous future in the banks. There's been little success with the government's bailout, and shareholders have to be thinking, the taxpayers will come first, not them. So, that's prompted some discussion about nationalizing the banks.

We're joined by our economics correspondent, Chris Farrell. Chris, we've sunk billions into the banks, but, or . . . aren't we already on the way to nationalization?

Chris Farrell: Well we have, what term should we use, creeping nationalization. If you think about with Bank of America and Citigroup, and we have a stake in these big banks, and they're too big to fail. So we have this creeping nationalization. But we also have this sense, Scott, that we need something different. A different program that we're moving back toward this world of haphazard, ad-hoc rescues, shifting from crisis to crisis. And so this is why, is it the right move to nationalize the U.S. banking system, that essentially the government, you and I, become the owner of the banking system in order to shore it up?

Jagow: How could we do it?

Farrell: Well, you know, one of the reasons why it seems far-fetched is we have a very large, very diverse banking system, and plus we also have credit unions that are really part of our banking system. And this is what is having people struggle a little bit. You know, what would nationalization look like here? Do you just nationalize the really big ones, the ones that are too big to fail? But then how does that affect the ones that aren't going to be nationalized? And here's the nub of the problem: banks have a lot of really bad assets. So there are a couple of solutions. One is isolate them, right? Put them in some sort of bad bank or something like that, so you put a ring around them. Another one is just say, you know we just can't figure this out, so what we're going to do is just have the government nationalize the banking system, and we'll recapitalize the banking system this way. We'll bring money into it, we'll get rid of the bad assets, we'll dress them up and we'll sell them back to the private sector.

Jagow: Yeah, I could imagine though, CHris, that doing this would be A. Very, very costly, and B. Those toxic assets are scary, and we could plunge ourselves even further into problems.

Farrell: But the thing is you need to do something, right? No one wants the government to own the banks, but the feeling is growing that we have to consider this, that that may be a precondition of getting private capital to come into the banking system again.

Jagow: Is there enough support for that idea?

Farrell: No. I don't think there's enough support for that idea. I think there's a discussion going on among the elites, it's going on among the economists, it's out there, it's being discussed -- but no, I still don't see support in the United States for nationalization of the banking system. No.

Jagow: OK, our economics correspondent, Chris Farrell. Thanks.

Farrell: Thanks a lot.

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Weren't Fannie Mae and Freddie Mac essentialy a "nationalized bank" run by the government? Didn't they fail and cost us Billions? Why would anybody think the government could do a better job by taking over all the banks? And why are the CEOs of those banks that failed not being prosecuted under Sarbanes-Oxley - it seems somebody wasn't issuing accurate finacial reports.

The problem seems to be that certain banks are "too big to fail". Why not nationalize those bloated banks then sell them off in small portions and try to break even. We could then set regulations that would not allow banks to get that large again. If it is to big to fail then it should not exist?

At current and past lessons , we all know that the banks open their business , they must have the accountable and trustable manners in their responsibility , this is basic standard , if they fail , we should let it fail , this is the competitive marketplaces as domestic and international business opportunity , who act professional servives and competitiveness , they will win in market , we need to have the major professional strategy to implement the bank system , but not nationalization without key components.

I listened to this morning Chris Farrell interview on bank nationalization....and was nauseated.

My brother, an international banker in the Pacific sector until he died of AIDS years past, once explained the business of banking to me like this:
"You have to be an absolute idiot to lose money banking. You are the dealer and the rules are rigged in your favor; the regulations are set up to keep you from doing something stupid, you are in an oligopoly that guarantees you a profit. How /could/ you lose?".

Well now I know: You fight tooth and nail to eliminate the regulations, and then you do a whole mess of stupid.

So we are to take over the banks, take over their toxic crap, make it our toxic crap, make them profitable again...and sell them back to the private sector, so they can again have a guaranteed way to make money without risk. However necessary a functioning banking system is, this makes me nauseous: We pick them up, we takeover their toxic waste...and then they make money off us again while we deal with their toxic waste. Mmmmm-mmm.
Rotarian socialism.

BTW, back in November, the Commonwealth Club of CA had an amazing address by the CEO of Wells-Fargo. The economic storm had then already broken, though we didn't then know how bad it could be (and maybe still don't). Yet his whole speech was the gleeful tale of how he had spent his bank career (much of it at Citibank) dismantling and making end-runs around the bank regulation put in place in the aftermath of the Great Depression to make banking even *more* profitable. He was *proud*. And there was not one question from the audience questioning what this fool and others of his ilk had done to destroy the integrity of the banking system.
The CCoC podcast is here:
http://audio.commonwealthclub.org/audio/podcast/cc_20081021_kovacevich.mp3

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