Bank Nationalization
What are people's thoughts on the temporary nationalization idea going around amongst economists.Greenspan supports it.
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b/c greenspan has been so right in the past?
No he's a free market guy. Nothing to do with whether he is right or wrong. A temp. nationalization runs contrary to his principles.
Here is the link to Greenspan's speech:
http://econclubny.org/files/Econ_Club_of_NY_FINAL.pdf#PDF
He makes some good points - it is a very interesting turn for him, but I believe he is (rightly) scared of what will transpire if we continue to approach this in the slap-shod manner we are now. Best to suck it up and nationalize now rather than let it drag out if the end result will be the same would be how I'd summarize his thinking.
He doesn't explicitly adress nationalization in the article. But it was absolutely brilliant nevertheless. It was especially interesting how he pointed out that equity verses having predictive value is actually more of a causal mechanism for econ. activity. He really takes the econ. crisis froma different angle that most of mainstream never really points out, implying that attracting private capital is mainly overcoming fear.
Lets (attempt to) have an intelligent discussion here.
What benefits does nationalization have over the government simply purchasing the bad assets off the bank's balance sheet? Simply purchase the bad assets would provide immediate liquidity to banks, boost their tier 1 capital ratio, and stem nationalization fears. Finally, it would allow the government to support the system without attempting to run it, as they have repeatedly proven incapable of doing.
Can someone comment on the pros or additional cons to nationlization?
Citi and BofA have effectively been nationalized for a while.
Good to see people are avid headline interpreters.
No wonder we are where we are.
Off the top of my head, my take on nationalization
Pros: -Buying the whole bank means the government doesn't have to attempt to price the bad assets -It eliminates the moral hazard that will cause banks to dump every asset the government overvalues on taxpayers, even if it is not a danger to the company's books -Arguably greater upside potential for taxpayers -The government holds enough equity in these banks it is a fait accompli - formally nationalizing them would simply be hedging against downside risk -Could diminish long run moral hazard for holders of financial equity -Strong signal that the government is intent on ending this now and is no longer f-ing around
Cons: -Conflicts of interest, particularly if the government owns multiple banks, or when government owned banks must fight government agencies -Endemic populism could destroy bank morale -The gov't holds significant equity in the banks, so incentives are already aligned and nationalization is unnecessary -Could signal continued indecision on the part of gov't -Could prompt general mass exodux non nationalized banks (unlikely)
I think the keys to any nationalization are that it has to be large enough and cohesive enough that there is no doubt where the government is going. Commitments have to be credible, and the feeling has to be that the government has a plan they will stick to as long as long as everyone plays ball.
Most of the pro's of nationalization could still be realized with purely buying the toxic assets and recapitalization. Formal nationalization would also conflict with a variety of intl. laws in place that forbid nationalization of multinational corporations (don't know the specifics of the statutes.
However I can empathize with the nationalization argument to an extent. The major problem right now is in the corporate debt markets. To my understanding, corporate lending has pretty much dried up, which is having a drastic impact on economic growth prospects. In addition, as Greenspan pts out, equity investors are consumed by fear and requiring higher tier 1 ratios before they put $ back into the stock market which is further exacerbating the dried up corporate debt market. Nationalization to some extent could get the ball rolling again as the US gov's interests are aligned with the U.S economy's verses stock holders. This isn't a good thing long term. But for right now, in terms of jump starting the economy, having someone running these banks who are willing to jump start corporate lending can very quickly impact economic growth prospects.
Although, long term, you definitely need free markets to run the banking system. Imagine if the government effectively governed the allocation of capital in the economy. There are mutual funds, pension funds, hedge funds etc and other intermediaries that contribute to capital allocation, but the banks are still a huge provider of capital to the economy.
Lets imagine the banks effectively governed the banking system's allocation of capital, and what the future prospects for out economy would look like.
i think you missed perhaps the most important con associated with nationalization: it would significantly raise banks' cost of capital for at least the foreseeable future. once washington demonstrates that it is willing to step in and wipe out banks' equity holder and cram debt holders way down the capital structure, the risk associated with banks will fundamentally increase. this, i suspect, will increase the cost of credit for the broader economy.
So basically, your point is that if one bank is nationalized this will raise fear for the entire banking system and spreads for bank debt will go dramatically up, thereby sprialing throughout the economy?
Yeah, that's his point, which is why the government has to credibly commit to not nationalizing any more banks, or set up clear guidelines as to when banks would be nationalized. I'd hope the US gov't's word is good enough, but I'm not sure it's a credible commitment at this point. Maybe putting 1tr in an escrow fund with payment going to the third world would satisfy everyone... though I'd like to see liberals explain why the escrow money should never actually go to help poor people
Government keeps changing the rules in the middle of the game. Of course, there is no confidence.
If nationalization happens, there better be some clear guidelines or we will just see firms getting picked off left and right.
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