Monday, November 24, 2008

Don’t Nationalize the Banks

In the latest issue of The Nation, Bill Greider expresses what has become the mantra of the left at this moment of high fiscal drama: nationalize the banks. Rather than just injecting passive capital, we are told to take a decisive position in common (voting) stock, so we can change the management, put our foot down on compensation, and generally change the whole modus operandi. It sounds very radical, harking back to the days when socialists saw nationalization of the commanding heights of the economy as the first step toward nationalization of the minor peaks, foothills and ultimately just about anything above sea level.

But it’s a bad idea. If you want the banks, you can have them. After the hammering they’ve taken in the market the last few months, their combined capitalization is a tiny fraction of the Fed’s new, gunky portfolio. And there’s a reason: they’ve got a solvency gap of trillions of dollars. Buy a bank and its liabilities are now yours. If you happen to be the US government, your full faith and credit is on the line for every penny.

There is nothing radical, not to mention equitable or practical, about underwriting the vast quantities of dubious financial instruments that metastasized during the past decade. You want a publicly owned and managed bank to lend against the tide and finance reconstruction? Start a new one.


Myrtle Blackwood said...

You want a publicly owned and managed bank to lend against the tide and finance reconstruction? Start a new one.

Yes. It's clear that governments are far more concerned with saving the private financial system than they are with making the system viable for society in general.

Look at the history of government intervention in the banking system over the last 4 decades.

TheTrucker said...

We only need to look at recent history (late 90's) to understand the current mess. And I believe that Peter Dorman is totally and absolutely correct, The "financial industry" (and I use the words loosely) does not have much to do with the real world. The supposed "credit crunch" is only a pile of IOU's created by the players inside of the "financial industry". These markers have nothing to do with Joe the Plumber or me or you. CDS's and CDO's have nothing to do with the real world. These are monopoly money and betting slips.

"What are you ranting about", Trucker?

I am ranting about the fact that only the money spent into circulation directly by the United States government is real money. All such money is an obligation of the government that creates it in that said government is obligated to accept such money as payment of taxes.

You can argue that commercial bank money (created to track the course of a loan in the real economy and extinguished as a loan is paid back) is also money because it trades at par with the government created money. That is fine but the commercial banks are regulated by the Fed.

All money as heretofore described is an obligation of the government that creates it or that oversees and regulates its creation (commercial banks). But this "value" of bank money rests on the license of the banks to legally repossess and re-market a tangible asset which is the basis of the loan. In the current mess the tangible assets are homes for which the value was overstated. But that is the limit of any obligation of the US government and even this obligation is questionable.

CDO's are not money. There is no tangible asset and no government obligation. Derivatives are merely bets and wagers between financial players. These are not backed by tangible assets. The United States government has no obligation to enforce such contracts. It ain't real money.

If Glass-Steagall had not been removed then there would be no intertwining of the CDO people and the commercial banking people (and I am not real sure that there has been or was any significant intertwining before the "bailout"). And if the Commodity Futures Modernization Act had not derailed the efforts of The Commodity Futures Trading Commission in its move to regulate CDO's and CDS's on an exchange, then we would not have this mess in the "financial sector".

"Government Should have regulated" is a two edged sword. The fact is that at the request of the deregulation morons the government did not regulate and hence, government bears no responsibility for the juvenile actions of the deregulated morons.

Anonymous said...

This original post by Dorman is dated Nov. 24, 2008. Two months later, on Jan 21, 2008, the words "nationalize the banks" were aired and agreed with by three interviewees on the PBS News Hour. It's time for a fuller expression of Plan B.