Blinder: Nationalize?

Alan Blinder is not a fan of nationalization:

Nationalize? Hey, Not So Fast, by Alan S. Blinder, Commentary, NY Times: ...When philosophical conservatives like Alan Greenspan start talking about nationalizing banks, you know you’ve passed into some kind of parallel universe. ... Like Ben Bernanke ... and Timothy Geithner,... I am not convinced that nationalization is the only, or even the best, way out. ...

[D]idn’t Sweden pull this off with great success in the early 1990s? Yes... But this is not Sweden. Let’s think about some of the downsides to nationalizing banks in America.

Where to draw the line? First and foremost, the Swedish government had to deal with only a handful of banks; we have more than 8,300. ... Presumably, no one wants to nationalize all the banks, thousands of which are healthy. But where do you stop, once you start?

Suppose we nationalized four banks. Bank Five would then find itself at a severe disadvantage in competing for funds... Forced to pay higher interest rates... Bank Five might start looking like a candidate for nationalization, too — followed by Banks Six, Seven and so on. ...

The Management Challenge The Swedes ... never had to deal with institutions of the size and complexity of our banking behemoths. Mr. Geithner has emphasized that governments are ill-suited to manage businesses. I’d take the point a step further: Overseeing the management of dozens, or hundreds, or maybe even thousands of nationalized banks is a daunting task.

Political Obstacles The process of nationalization and reprivatization ... in Sweden ... was remarkably free of political interference. Would that happen here? You decide. My bet is no.

The Confidence Question Finally, because nationalization runs counter to deeply ingrained American traditions and attitudes,... it might undermine rather than bolster confidence. ... The Treasury, of course, would never use “nationalization” in public; it would invent some nice euphemism. But the commentariat would not be so constrained.

All of that said, there are arguments in favor of nationalization. Or are there?

One is that financial firms are careening off track, thereby costing taxpayers more and more bailout money. (Think A.I.G.) That’s a ... major reason to seek quick closure. But ... the government already owns shares in many banks, and ... the Fed can pretty much dictate to the banks right now, what additional powers would nationalization bring?

Another argument is that banks’ dodgy assets are hard to value, making it impossible to know how much capital they need — and probably very expensive to provide it. True again. But nationalization doesn’t make these problems disappear.

If the government takes over a bank, the taxpayers ... inherit... all the uncertainties over valuation. And if a bank has negative net worth when it is nationalized, who do you think fills the hole? ...

Worse yet, even talk about nationalization can be harmful if it puts bank stocks under further selling pressure. After all, who wants to own a stock whose value is heading toward zero? Which is why Mr. Bernanke and Mr. Geithner have taken pains to beat down rumors that nationalization is coming.

Unfortunately, their denials can never be categorical. If worst really does come to worst, the other options may evaporate, leaving the government no choice but to nationalize some banks. ... But, please, let’s not rush there. Let’s first at least explore what is called the “good bank, bad bank” approach.

What’s that? While there are many variants, the basic idea is to break each sick institution into two. The “good bank” gets the good assets... As a healthy institution, it can presumably raise fresh capital and go on its merry way as a private company.

The “bad bank” inherits the bad assets and the rest of the capital — which, after appropriate markdowns of the assets, will not be enough. So, again, someone must fill the hole. And, realistically, given the mess we’re in, much of that new capital would likely come from the taxpayers.

Here’s a prediction: We will get to the good-bank, bad-bank solution sooner or later. Wouldn’t it be nice if it was sooner?

Blinder's colleague at Princeton, Paul Krugman:

How many banks?, by Paul Krugman: One objection you keep hearing to nationalization pre-privatization as part of a bank restructuring effort is that the US financial system is just too big and complex. ... But are we really thinking about thousands of banks? Here’s Martin Wolf, today:

The four biggest US commercial banks – JPMorgan Chase, Citigroup, Bank of America and Wells Fargo – possess 64 per cent of the assets of US commercial banks (see chart) [chart not available online]. If creditors of these businesses cannot suffer significant losses, this is not much of a market economy.

So as far as this discussion is concerned, we’ve got, like, four banks. The “thousands of banks” line is just a diversion.

And:

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly. ...

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) Realistically, it’s just not going to happen.