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LQD : Shoot the bankers, nationalise the banks

by Melanchthon Thu Jan 22nd, 2009 at 04:22:45 AM EST

The nationalization idea is gaining momentum. Along with the already mentioned papers from Paul Krugman and Willem Buiter, other voices promote it as an unavoidable policy:

FT.com / Philip Stephens - Shoot the bankers, nationalise the banks

For once, Gordon Brown is guilty of understatement. The other day the prime minister remarked on the rising public anger at the behaviour of Britain's banks. Unbridled rage would have been a more accurate description of the national mood.

On a recent visit to Washington I heard several people say that when the reckoning is finally made some big Wall Street figures are going to end up in jail. My impression is that many on this side of the Atlantic would like to see one or two British bankers join them.
...
Dissembling, I have concluded, is hard-wired into the banks' DNA. Mr Brown seems to have encountered the same lack of candour in his discussions about rather larger sums than my now-reduced overdraft.

The prime minister has no option but to pay up. To say that taxpayers are appalled is not to conclude that the banks could be left to tighten the noose on the nation's economy.
...
Mr Brown is at pains to say that all this does not amount to a blank cheque for the banks. Alistair Darling, the chancellor, insists that the price of the insurance scheme will be a "lending responsibility agreement" with precise targets for new credit for individuals and small businesses.

Now it has gone this far I cannot understand why the government did not take the next logical step of assuming majority stakes in all those institutions now dependent on public money
...
For the moment, though, I cannot think of a more popular policy than shooting the bankers and nationalising the banks. It might even win Mr Brown an election. Come to think of it, it could also be the way to get us out of this mess.


Even The Economist chimes in! (read on...)

front-paged with edit by afew


Why not nationalise? | Free exchange | Economist.com

AS TROUBLES in the banking industry have moved back into the limelight, the need for a broader, and more effective solution has again become clear. While the use of the initial TARP allotment has prevented any immediate collapse, it seems clear that fears of insolvency (and actual insolvency) are going to remain a problem. Some banks will be forced to return to the trough repeatedly, and lending, in general, will remain moribund.
...
But it seems to me, based on an ongoing blogospheric discussion, that nationalisation is the only good option left. The basic problem is this--some banks are likely insolvent. Any option that solves the problem by buying bad assets will either fail (if those assets are bought at face value--recall, the banks are insolvent) or will succeed by buying those assets at well more than they're worth. The latter option is a large and generous gift to the bank's shareholders.
...
These banks grew so large that their faliure threatened the global financial system, and then proceeded to fail. To simply hand over the money necessary to return them to solvency would abuse the taxpayer's trust, reward bad behaviour, and send a terrible signal to other bad financial actors out there. Time to quit mucking around and make with the nationalisations.

The Financial Times has created a collection of links on nationalization:

FT Alphaville » Blog Archive » Nationalisation linkfest

To nationalise or not to nationalise?

The UK government has shown its hand. TARP II is underway in the US.

If the latest gamut of policy responses don't work - and there's plenty who say they won't - then nationalisation of banks is very much the only option left.

With that in mind, FT Alphaville has rounded up a selection of the pro-nationalisation views currently on offer .


Here are some excerpts:

British banks are 'technically insolvent' - Business News, Business - The Independent

Britains biggest banks are "technically insolvent", Royal Bank of Scotland said yesterday, as the global banking industry was rocked by another day of turmoil, including the announcement of $23bn (£16bn) of new losses from Merrill Lynch and Citigroup, the giant US institutions.

Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that "the domestic UK banks are technically insolvent on a fully marked-to-market basis".


Bronte Capital: A slogan for the new administration: nationalisation after due process
Now there is a cost to these guarantees.  They are expensive - especially in an ex-ante sense. The taxpayers are taking a risk - and they should be compensated for that risk. That is a basic capitalist principal - but it also is just plain fair. Real capitalists nationalise.

Display:
I agree with something in the Financial Times and the Economist, at the same time and on the same subject. That usually means that I've been missing a couple of essential facts...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 21st, 2009 at 02:15:19 PM EST
My cynical guesss is that they see the nationalisation as unavoidable and thus want to get in early to influence the terms of the nationalisation and the nationalised banks. They do not actually love the "free market" they love the money it gives them and their brethren. So the important part is not if but how a nationalisation happens. So long as it is costly for the commons schmucks and pays huge salaries and bonuses it is all good.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed Jan 21st, 2009 at 03:12:01 PM EST
[ Parent ]
is that one sees an increasing number of suggestions of the "shoot the bankers" of "jail the bankers" kind - heck, even Philip Stephens is endorsing it!! Nationalisation is a rather better outcome, from the perspective of the bankers...

The fact is, nationalisation is inevitable and the smart people now see an advantadge in preemptively discussing it.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jan 21st, 2009 at 03:38:44 PM EST
[ Parent ]
The financial collapse has come to threaten the international position of the Anglo-American oligarchy. As my former boss and economics editor Chris White wrote yesterday:
The foundations of the United States international position as a whole were threatened in perhaps the most profound way ever. I could not begin to take on the idea of thinking about what the world would look like if the US between the summer of 2008 and the winter of 2010 went through the same kind of process the former Soviet Union did.

http://discuss.epluribusmedia.net/node/3510

On the day that a new American President was inaugurated, the Lords of the City of London decided to quietly announce in their newspaper of record, the Financial Times, that there are about to be major shifts in policies and practices.

On Monday the UK government declared total war on the economic crisis, and not a moment too soon. A long phony war ended abruptly with the financial system’s near-meltdown in October. Now, in the next phase of the crisis, the government is thankfully using a full arsenal of ammunition.

The October intervention was designed in haste but succeeded in staving off a collapse of the banks. What it failed to do was to restart lending. The credit crunch has now worsened to the point where the real economy is harming the banks, not just the other way around. . . .

The government must immediately get to grips with the banks’ balance sheets and make sure that its remedies are indeed large enough. It must stand ready to recapitalise banks further, even to the point of full public ownership of banks that turn out to be insolvent.

Even a perfect bank rescue will not by itself end the crisis; the problems have spread too widely. It can, however, ease the credit crunch and help fiscal and monetary policy revive the real economy. Letting the Bank of England trade corporate securities gives it a tool later to engage in quantitative easing if further interests rate cuts are not enough. In total war, full mobilisation is the only way. (Emphasis mine)

               

This is the EDITORIAL of the Financial Times ?!?!? My God, the world has shifted on its axis. The fine "gentlemen" of the City of London have actually been forced to look over the edge of the precipice into the fiery furnace of the abyss, and now realize they must allow the real economy to be rebuilt. Because, as the FT editors write, "the real economy is harming the banks." The plebes have been so impoverished, they've stopped buying! Worse, they've stopped borrowing, too!

 

The key to understanding this radical shift in the oligarchy’s thinking is to realize that this is not just about economics, or saving their financial power. This is about world domination and the continued existence of Anglo-American power.


The expectation was the trillions of dollars and pounds thrown at the crises since October would stabilize Wall Street and the City of London, allowing equity markets to bounce back, and markedly improving the banking situation.

But these crises are much, much worse than 1929, because the shadow banking system had been allowed to create assets that were completely fictitious (as Michael Lewis described in his Portfolio article last month). We’re talking about assets – trillions of dollars of financial derivatives, especially the credit default swaps explained by Lewis - that were not just inflated, but completely fake. Derivatives had grown to some $160 trillion – how could that ever be bailed out? Oh, but they tried, and now are forced to admit that it can’t be done.  

So, the equity markets did not bounce back. The banking situation has actually gotten worse, as the collateral damage done to the real economy has become so severe that it is actually curtailed demand for credit; i.e., "the real economy is harming the banks." Wall Street and the City of London are now in worse shape than they were in October. So now, in desperation, they are willing to jettison the very tenets of their economic theology. So, suddenly, there are calls from everywhere for nationalizing the banks.

As Jerome notes, Sterling has collapsed to a 25-year low against the dollar. The financial giants of the City of London have become almost worthless. Britain is reportedly two days away from running out of natural gas. In other words, the country is BANKRUPT. Not just one or two or three banks, but the entire effing country. Which threatens to dislodge Britain from the league world powers. Why, Argentina could conceivably become more powerful than Perfidious Albion in just a few short years!

Even worse, the same financial follies have also destroyed the United States. Russia’s recent stoppage of natural gas shipments to Europe may suddenly have caused the Lords in London to realize that the financial collapse of Wall Street and the City of London opens to door to the emergence of several other Great Powers, such as China, or India, or Brazil (did you know that the largest machine tool builder, now, in the U.S. is actually the Brazilian company Romi?), or Russia. Good Lord, even those inscrutable Japanese might break out of their shell!

No, this is about much more than the financial collapse now. This has become a desperate struggle by the oligarchy to maintain basic control of the world economy and its resources. This has become a fight for existence itself.

by NBBooks on Thu Jan 22nd, 2009 at 09:53:18 AM EST
[ Parent ]
I noted a while back that we would be seeing epiphanies of the existing system with increasing frequency, but this is in a class by itself!  This would be the most hilarious comment to date, were the implications not so dire.  Instead it serves to highlight the extent to which narcissistic self absorption has enveloped the elite responsible for presenting an "all-is-well" image to the public.  It is as though when Toto tugs back the curtain the wizard is not some pathetic old man but rather is some repulsive, uncaring alien creature.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 06:07:37 PM EST
[ Parent ]
Is this a Putsch?  Are you trying to take over ET?  What have you got against our Jerome?  ;-)

More seriously, this is going to become a huge issue in Ireland as well.  The no. 3 Bank- Anglo Irish, has just been nationalised.  The Government is still ideologically opposed to Nationalising the big two but their share price has collapsed so much that the biggest, AIB, is now worth €-1.5 Billion if you strip out its foreign subsidiaries.    That's right, that's a minus in there.

Clearly the market thinks they are now worthless.  So why would anyone invest in them, and how can they continue to operate as traditional private businesses?

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 21st, 2009 at 02:45:07 PM EST
I mentioned the idea in a chat on Le Monde website with Xavier Timbeau, diector of the analysis and forcast department of the OFCE. Here is his answer:

"Rien ne garantit qu'il y aura une reprise en 2010" - L'économie en crise - Le Monde.fr "There is no guarantee that there will be a recovery in 2010" - has economy in crisis - The Monde.fr
Melanchthon : La fin du premier trimestre verra une crise de liquidités due aux retraits des investisseurs des hedge funds. De nombreux économistes pensent que la seule solution à la crise du système bancaire est une nationalisation massive et que les gouvernements s'y refusent pour des raisons idéologiques. Qu'en pensez-vous ? Melanchthon: The end of the first quarter will see a liquidity crisis due to withdrawals of investors in hedge funds. Many economists believe that the only solution to the crisis in the banking system is a massive nationalization and that governments are reluctant for ideological reasons. What do you think?
Xavier Timbeau : La crise de liquidité des hedge funds était annoncée pour la fin de l'année 2008, elle se produira peut-être à la fin du premier trimestre 2009, et même si on a été habitué à voir les scénarios les moins probables se réaliser, cela reste pour le moment plus une menace qu'une réalité concrète. Si cet événement ou tout autre événement qui viendrait compromettre la situation des banques se produisait, on pourrait être amené à poser à nouveau la question du sauvetage des banques, et donc de leur nationalisation.Xavier Timbeau : the liquidity crisis of hedge funds was announced by the end of the year 2008 e, it may happen at the end of first quarter 2009 and, even if we have been accustomed to see the less likely scenarios occur, this is yet more a threat than a reality. If this event or any other event that would jeopardize the situation of banks occured, one might be lead to ask again the question of rescuing the banks, and thus their nationalization.
Cela étant dit, dans beaucoup de pays, on a trouvé d'autres solutions que la nationalisation, qui a eu lieu par exemple au Royaume-Uni mais qui n'a pas été pratiquée aux Etats-Unis, où l'Etat est intervenu en prêtant à long terme par les titres subordonnés, les actions sans droit de vote, les fonds propres dont les banques avaient besoin. Il ne s'agit pas de nationalisation, puisque le gouvernement américain n'a pas pris le contrôle des banques. C'est effectivement une raison idéologique qui motive cette approche qui consiste à dire que l'on préfère que les banques soient gérées par leurs actionnaires plutôt que par l'Etat.That said, many countries have found alternatives to the nationalization, which took place for example in the UK but has not been implemented in the USA , where the State intervened by lending in the long-term through subordinated securities, non-voting shares, the capital that banks need. This is not nationalization because the US government has not taken control of the banks. There is indeed an ideological reason behind this approach which consist in saying that one prefer that banks be managed by their shareholders rather than by the state.
Cela dit, c'est déjà une pente dangereuse, parce que les actionnaires gèrent les banques, mais plus simplement avec leur argent, mais aussi avec l'argent des contribuables. Donc l'approfondissement de cette logique posera de façon de plus en plus crue la question de la contrepartie de ces capitaux mis à disposition par les gouvernements et donc par les contribuables, qui s'impose aux actionnaires de ces banques, que ce soit en matière de pratiques bancaires, d'éthique, de rémunération des dirigeants ou de dividendes versés aux actionnaires. Et cela posera aussi la question du fonctionnement concurrentiel du secteur financier dans un univers où c'est le gouvernement qui apporte les capitaux, et plus simplement des actionnaires privés.However, it is already a dangerous slope, because shareholders manage the banks, but not anymore only with their money, but with taxpayers' money. So the deepening of this logic will raise more and more clearly the issue of the counterpart imposed on the shareholders of these banks for these funds made available by governments and therefore taxpayers, either in terms of banking practices, ethics, the remuneration of managers or dividends paid to shareholders. And it will also question the functioning of the financial sector in a world where the government provides the capital and not anymore only private shareholders.
Donc la nationalisation pure et simple peut sembler résoudre d'un seul coup tous ces problèmes, mais en fait, elle pose le problème de mettre en place une administration qui fera le travail que faisaient les actionnaires et les dirigeants des banques, à leur place, et en réussissant le prodige que toutes les incitations perverses qui s'étaient mises en place auparavant soient entièrement contrôlées et maîtrisées. Et cette question est aussi difficile que la première et la nationalisation n'apporte pas par elle-même la réponse à cette question.So the outright nationalization may seem to solve at once all these problems, but in fact it raises the problem to establish an administration that will do the work shareholders and directors of banks did, in their place, and miraculously controlling and mastering all the perverse incentives that were put in place earlier. And this issue is as difficult as the first and nationalization is not in itself the answer to this question.


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 21st, 2009 at 02:59:55 PM EST
OK, so he ends on the real question for right now (or yesterday ;)), how to manage the nationalised banks in a way better adapted to current economic problems, or, what do we do with the banks once nationalised?
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jan 21st, 2009 at 04:06:32 PM EST
[ Parent ]
Exactly. Besides the necessary firing of the top management, the big problem is the transformation of the banks' culture as well as the incentive system, the management guidelines, indicators and tools.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 21st, 2009 at 04:17:19 PM EST
[ Parent ]
All of which Governments are not very good at doing, if their management of the public service is any guide...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 21st, 2009 at 05:23:43 PM EST
[ Parent ]
It depends on the country you're referring to. Anyway:
  1. They can't do worse than the current management,
  2. I'm pretty sure they can find good managers within the existing staff of the banks,
  3. They can ask some excellent consultants to help them...;-)


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 21st, 2009 at 05:48:24 PM EST
[ Parent ]
Reagan was partly right saying: "Government is the problem."  This is certainly true when that government is run by Republicans.  We see the effectiveness of all of Paulson's brilliant management of the disposition of the first half of the TARP funds.  If the Obama Administration does not quickly jettison residual neo-lib economic dogma, they could turn out to be little better.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 21st, 2009 at 11:46:18 PM EST
[ Parent ]
Concerning your first sentence: "Reagan was partly right saying: 'Government is the problem.'"

Reagan was never right about anything, partially or otherwise. As detailed in Stockman's book, numbers were created out of thin air, then modified to comply with political dogma. Famously in one instance, a major component (defense spending increases, if I remember correctly) were multiplied by 4 just because Reagan misunderstood a number as being yearly, instead of the sum spread over the course of his first 4 year term, and no one wanted to call him on it.

In the course of it all, the interest on the debt alone rose to a yearly amount ($138 billion in 1987) greater than the original budgeted defense budget ($136 billion in 1980 - One has to qualify that, since there was so much off-budget...but I don't want to get into the whole Bush black-ops thing.)

My point is merely this. What we (USians) have had in the last 28 some years has not been government. It has been manipulation of assets for the monied class, it has been a continuous death-rattle reaction to the humiliation of losing an undeclared war in Viet Nam, and it has been hopefully the last desperate gasp grasp for riches by those who see that the arc of history is not going to go their way...but it hasn't been 'government'.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Thu Jan 22nd, 2009 at 10:12:04 AM EST
[ Parent ]
Well, he was right in that the sort of people he appointed to office made certain that government was a problem.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 02:40:40 PM EST
[ Parent ]
Very funny.

It is like saying that, given the root of the word 'govern' is Latin and Greek, 'to steer', that they did govern by steering us and our future into the rocks.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Thu Jan 22nd, 2009 at 03:50:28 PM EST
[ Parent ]
It is funny, but it also was policy.  As to Ronnie, I have characterized the "Reagan Philosophy" as a Shoebox Full of Shibboleths.  This is based on Ronnie's habit from the time he was a G.E. spokesman of carrying around a shoebox full of Reader's Digest anecdotes and news clips from which he would construct speeches.  By dint of insufficiently challenged repetition this got elevated to the status of a political philosophy.  Sadly, this was the highest form of philosophy which he could grasp, which well suited him to his audience.  That made him a useful tool.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 04:59:46 PM EST
[ Parent ]
they did govern by steering us and our future into the rocks.
And we applauded all the way, even after the ship hit the rocks.  Only now, with a new hurricane bearing down on the still stranded ship, is the applause starting to die down.  Most people still see no relation between Reagan's "government is the problem" and "let the fox guard the henhouse" approach and our current difficulties.  They are outraged at bankers using public monies to pay bonuses, but see this as some sort of aberration instead of recognizing it as an epiphany of the actual nature of the existing system.  These are the sort who "would hate to think" that that is how our system actually works.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 05:16:19 PM EST
[ Parent ]
The weird thing is that generations will be paying for this, and complaining about what the liberals have done to their kids, romanticizing Uncle Ronnie all the way to their graves.

I can't talk about him anymore. It is not healthy.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Thu Jan 22nd, 2009 at 09:09:28 PM EST
[ Parent ]
I am the eldest of three brothers.  My father died when I was 12.  I am 5&1/2 and 11 years older, respectively, than my brothers.  When the youngest was 22, in about 1977, all three were reasonable liberals.  By 1980 I was the only one who voted against RR.  It seemed as though an evil spell had been thrown over the world that even limited what basically good people, such as Clinton, could do.  I am not yet convinced that the spell is gone. Thirty years of bitter lessons.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 10:00:31 PM EST
[ Parent ]
That's sweeping enough to be ideological, Frank. Management of public service-type activities (telecoms, anyone? Rail?) by private interests can be arguably worse than anything state-owned services ever did. And, in this case, the banks are collapsing because private interests on the marketplace have utterly failed.

The point of my question was precisely to say, however, that nationalisation is not a panacea. We should be talking about what it should set out to do, what are the right policies, what rules should be followed, what best management practice should be adopted.

Taking pot-shots at the guarantor of final resort, when private interests have shown massive irresponsibility seriously threatening ordinary people's livelihood, is kinda misplaced, imo.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 22nd, 2009 at 03:49:30 AM EST
[ Parent ]
Disclaimer: I hadn't seen Melanchthon's comment below on John Gapper's piece, when I wrote that!
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 22nd, 2009 at 04:01:01 AM EST
[ Parent ]
Quite. Is there an example anywhere on the planet of privatised health care offering a better front line service than nationalised health care?

The US approach is a moral, financial and medical disaster for most of the population, and hardly seems like something to aspire to.

It seems bizarre to me that so many people are claiming that the private sector is still de facto better at business than government is, when the last two centuries have proven otherwise over and over.

The private sector is better at profit, but it certainly isn't better at providing consistent high quality services. It may provide better services sometimes, but only under very specific democratic and legislative conditions.

Otherwise the tail wags the dog right off a cliff and no one wins - the business sector least of all.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 05:35:41 AM EST
[ Parent ]
Technically, yes.

It's a mistake to conflate the systems of nationalized healthcare provision present in the UK and Spain with the system of nationalized health insurance that France and many other EU countries have.

And the French system generally comes out on top in surveys of national healthcare systems.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Jan 22nd, 2009 at 11:47:29 AM EST
[ Parent ]
The French system is currently being starve-the-beasted...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Thu Jan 22nd, 2009 at 11:59:46 AM EST
[ Parent ]
Far from being ideological, I am speaking from personal experience, and particularly in relation to Ireland.  I am constrained in what I can say specifically because I am on the Boards of three Charities who receive much of their funding from three separate Government Departments (and have to spend much of their management resource "managing" those relationships which are often quite dysfunctional.

On the more general point I would agree that there is nothing worse than a public sector monopoly except a private sector monopoly and I would always want key infrastructural resources to be in public ownership and control, particularly when it is dysfunctional or uneconomic or environmentally undesirable to have competing infrastructures.

If the current financial melt-down has taught us anything, it is that key parts of the financial infrastructure have become so strategically indispensable and vulnerable that they also need to be taken into public ownership to prevent some of the dysfunctional behaviours which precipitated the meltdown.

I am not enough of a financial expert to delineate precisely what the scope of that public ownership needs to be - it need not, for example, include many smaller retail banks, mortgage institutions, credit unions etc.

However once a bank becomes "too big to fail" it also becomes too big to regulate effectively, and thus must either be broken up into smaller components or taken into public ownership.

Even market ideologists who extol the virtues of competition have to accept that that model only works when there are sufficient players in the market to create real price competition and where the more inefficient or less innovative players have to be allowed fail for the good of the consumers within the whole system.

The reality is that big business is all about stifling competition by gaining near monopoly control of certain segments and thus being able to dictate prices.  Unless the regulatory environment can prevent this happening, public ownership is the only alternative.

The problem in todays globalising economy is that many corporations are bigger and power powerful that the states which are supposed to be regulating them, and even in the US the bigger businesses wield so much lobbying , media, and political power that they are effectively beyond regulation or fair competition.

In the meanwhile the political ideology of free market competition is still rooted in the economic realities of 50 or 100 years ago or of smaller businesses now.

My only concern with the nationalisation route is that managing such huge complex and specialised businesses is beyond the competence of most Civil Servants and the comprehension of most politicians and their constituents.  We are thus in danger of replacing a fundamentally dysfunctional private sector system with a badly managed public one.

We thus have two imperative:

  1. Dramatically improve our public sector management capabilities, and
  2. Better regulate those strategically important sectors which remain in private ownership

Calling for one doesn't obviate the need for the other and neither am I dogmatic as to precisely where the boundary between the two should lie.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 22nd, 2009 at 07:58:52 AM EST
[ Parent ]
if you take out the first paragraph.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jan 22nd, 2009 at 08:24:13 AM EST
[ Parent ]
I'm not sure I'm qualified to write a good FP story on this.  I don't have much knowledge of the banking industry, and have only been following the nationalisation debates through your and Melanchthon's diaries and the odd link.

The purpose of my intervention is to draw attention to the fact that running a major bank - or an entire banking system - is a non-trivial management challenge which politicians will tend to run away from because it could involve unpopular decisions and make them vulnerable to their electorates - who understand high finance even less.

Rather than having an ideological lets nationalise/ no you can't debate, it may be helpful to identify more precisely the dysfunctional aspects of the current system, the the parts which need more public oversight or outright control, and in particular the skills, structures and systems required to exercise that oversight/control more effectively.

The public will not want to be duped into "socialising the losses, after the profits have been privatised" and being left with the shell of a system which is poorly understood and doesn't work very well in the first place.

Long term we may well need entirely different systems and processes - on the lines advocated by Chris Cook - in any case, so now could be a very bad time to be taking on huge contingent liabilities in return for a business model which no longer works.

Ireland has Nationalised Anglo-Irish bank, whilst being adamantly opposed to nationalising the big two.  The "social partners" are now going to be asked to accept major wage cuts and cuts in public services to generate a minimum saving of €2 Billion p.a. (and rising) in order to reduce our public sector deficit from 10% to 3% over the next few years.

The Unions are bound to ask for a quid pro quo- if workers are to make such major sacrifices what guarantees do they have that they will also be the major beneficiaries when the economy turns around?

Some kind of corporate partnership and profit sharing model seems to be required - and Chris would be a great person to input into that design process.  I'm thinking of writing more considered piece as a LTE,op ed or other intervention into the Irish debate, and if I do I will of course also publish it here.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 22nd, 2009 at 10:38:41 AM EST
[ Parent ]
Long term we may well need entirely different systems and processes - on the lines advocated by Chris Cook - in any case, so now could be a very bad time to be taking on huge contingent liabilities in return for a business model which no longer works.

Can I point out that no-one appears to have any clue what the long term consequences of what Chris advocates would be?
by Colman (colman at eurotrib.com) on Thu Jan 22nd, 2009 at 10:42:37 AM EST
[ Parent ]
That tends to be the way with new ideas. I'm going through some of the practical ramifications with him at the moment.  There are elements of what he prooses already in place.  Partnership, profit sharing, employee Board representation, unitisation of future revenue streams are not all reasonably well understood concepts.  The key issue is that you cannot expect people to make huge sacrifices without some stake in future gains...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 22nd, 2009 at 11:06:42 AM EST
[ Parent ]
Colman:
Can I point out that no-one appears to have any clue what the long term consequences of what Chris advocates would be?

I do, and I've said it often enough.

Personally, I don't think much of the long-term consequences of the existing system.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 24th, 2009 at 12:18:16 AM EST
[ Parent ]


Iceland's government is on the point of collapse as angry protesters stake out the parliament in Reykjavik

It is the first time in Icelandic history that a young anarchist can well expect to meet his grandmother in the crowd demonstrating against the government and drumming with her kitchen knife on pots and pans. The government is surely hanging by a thin thread and might fall at any moment.

The Icelandic public fear that their country has virtually been stolen by the globetrotting business elite that spent more time rubbing shoulders with international high society than giving back to the society that enabled them to enjoy this privileged lifestyle. Now ordinary Icelanders are determined to take their country back.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jan 21st, 2009 at 03:45:50 PM EST
What's the difference between Iceland and Ireland - about 6 months - or perhaps that one is full of ice and the other of....

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 21st, 2009 at 04:17:07 PM EST
[ Parent ]
...beer?

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 21st, 2009 at 04:18:34 PM EST
[ Parent ]
to describe Southern European countries (somewhat derogatorily), it looks like we'll have the "aïelands"

("aïe" in French = "ouch")

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jan 21st, 2009 at 04:44:04 PM EST
[ Parent ]
...ire? :)
by Gag Halfrunt on Wed Jan 21st, 2009 at 07:18:50 PM EST
[ Parent ]
You win the prize

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 22nd, 2009 at 03:27:27 PM EST
[ Parent ]
I suspect that we are on the verge of some very interesting times.

I give the current US administration 6 months before the honeymoon ends, and things get real.

I don't see the Obama administration nationalizing banks, and I see that pretty quickly leading the US down the path the Icelanders and Irish have pioneered.

It's looking an awful lot like unemployment in the United States is going to hit 10% by that time, and will have already surpassed that in a variety of states.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Jan 21st, 2009 at 07:41:58 PM EST
[ Parent ]
FT.com / US & Canada - Geithner pledges `dramatic' action
The Obama administration will take action on a "dramatic scale" to revive credit markets and strengthen banks so they are able to lend, Treasury secretary- designate Tim Geithner said on Wednesday.

Testifying to the Senate committee considering his nomination, Mr Geithner said the Obama team was working on a "comprehensive plan" to deal with the banks and hoped to unveil it soon.

"We're going to have to do more to make sure that the institutions at the core of our system are strong enough that they can lend."

He refused to offer any insight into how this might work, in spite of pressure from the markets, saying: "We have seen the costs in terms of uncertainty created by tentative signals not followed up with clear actions."



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 21st, 2009 at 07:54:22 PM EST
[ Parent ]
I'd settle for effective action.

If I wanted dramatic action I'd buy a TV.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 06:12:52 PM EST
[ Parent ]
But, it's much more politically beneficial to appear to fix the problem in a big way on TV, rather than actually doing so without the fanfare.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Jan 23rd, 2009 at 09:08:14 AM EST
[ Parent ]
aye ye have a foin way with the words laddie...

i get the same vibe, as goes (roll the d)iceland...

at least they have hot springs!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Jan 22nd, 2009 at 03:25:10 AM EST
[ Parent ]
Calls to nationalise RBS and Lloyds as markets lose faith in bail-outs | Business | guardian.co.uk

John McFall, confidant of Gordon Brown and chairman of the Treasury select committee, called for the complete nationalisation of Lloyds and Royal Bank of Scotland tonight after shares in both banks crumbled, the pound skidded to a seven-year low against the dollar and government bonds were sold off sharply.

As markets took fright at the state of Britain's banking sector and the wider economy the day after the government's latest bail-out plan, shares in the loss-making RBS slumped to 10.3p, continuing Monday's 66% slide, while the new Lloyds Banking Group continued to fall rapidly as it looked likely that many UK banks would not be paying any dividends for years.

[...]

Jim Rogers, a veteran US investor, said the UK economy was "finished". He told Bloomberg: "I would urge you to sell any sterling. It's finished. I hate to say it, but I would not put any money in the UK."

Rumours were awash in febrile markets that ratings agencies could downgrade the UK's sovereign debt ratings if the government had to issue tens of billions of pounds of government bonds to finance its latest rescue for the banks. A downgrade would increase the cost of raising debt for Britain, the world's fifth largest economy. The price of insuring British debt against default also rose sharply.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jan 21st, 2009 at 06:26:07 PM EST
Rogers, to be fair, is a bit of a drama queen (assuming I'm thinking of the guy I believe I'm thinking of).  I do think the UK is in some serious trouble, even relative to the US and others, simply because of how all economic policy has been driven towards feeding the City and the Wharf, and given what significant chunks of the economy they represent.

The cost of insuring British debt -- and this is obviously a phenomenon we've seen elsewhere -- worries me.

The yields on gilts are also pretty scary.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jan 21st, 2009 at 08:55:15 PM EST
[ Parent ]
The UK does have some remaining light and heavy industry, and farming is significant too. I don't think the UK exports much in the way of food in bulk - it's mostly twee jams and various polite kinds of tea.

Even so it's not quite true that the City was the entire economy - just most of it.

What bothers me more is something I've mentioned before. The current situation is analogous to the end of industrialisation in the 70s in the UK. Semi-nationalised industries were being pumped full of public money then too, but all of them failed - partly through overly aggressive unionisation, but also because of incredibly inept and confrontational management.

So Thatcher appeared from whatever hell dimension she was spawned in and implemented financialisation, which happened so quickly and so comprehensively it was obviously ready and waiting for a nod.

This time there's no obvious plan in Whitehall. Nationalisation will be the first stage, but it's unlikely to be any more successful in the long term than it was in the 70s - because no matter what Gordo and Darling believe, running a financial economy rather than a productive economy is seriously fucking stupid.

So what's the alternative? Green energy seems like an obvious choice, but there's no more than 5-10 years of that at most, and once all of the windmills that can be built have been built the rest is repairs and renewals.

At that point the two choices become a steady state economy, with no more delusions of growth until the next technological revolution (biotech? space? good luck selling those here...), or outright violent revolution because there's nowhere else to go, economically or politically.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 06:23:47 PM EST
[ Parent ]
ThatBritGuy:
At that point the two choices become a steady state economy, with no more delusions of growth until the next technological revolution (biotech? space? good luck selling those here...), or outright violent revolution because there's nowhere else to go, economically or politically.

is that really going to be the only binary left?

i think people are going to succumb to the series of shocks and revert to better - and worse - behaviour patterns, better in the sense of more frugal (g'bye consumerism! heave-ho planned obsolescence), more co-operative, more solidarity, more bottom-up, lateral thinking, mycelial information sharing, ready to roll up sleeves and git to work, and for worse, those who lust for chaos as solution to the feeling that the system has always been loaded against them, and have given up hope of any joy in life save that of destruction.

these obviously have to be quarantined off until they see the error of their thinking...

it is in few peoples' interests to have mass panic and mayhem, and i think the conviviality long suppressed under the pressure of modern life will re-assert itself, as it does in most simpler societies quite naturally.

there might be be a period of bottleneck where extreme disorder may be legion, but i think most people will be too concerned about protecting their families (or too weak from hunger) to be getting too in the government's face by way of violent protest.

i expect sit-ins, ghandi style, people crowding together into giant fleshblobs to peacefully signal they've had enough, blocking traffic and thoroughfares, not as martyrs or heroes, just citizens who've all suffered one turn of the screw too many, exhausted and out of ideas.

there needn't be a drop of blood spilled, if the conviction and numbers are there. there is no national guard or equivalent which can coerce a whole failed middle class into disappearing, all that will be needed is to shame these leaders, so they come to us, stripping themselves of privilege just as obama has done with his salary cap.

he's smart, being proactive...

passive resistance

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Jan 22nd, 2009 at 08:18:03 PM EST
[ Parent ]
your coach is turning back into a pumpkin, england, and all your funny money won't buy it back.

shitty values, shitty karma.

5th largest economy...pushing poisoned paper promises and selling arms to corrupt despots...


'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Jan 22nd, 2009 at 03:30:27 AM EST
[ Parent ]
What strikes me is the weakness of the opponents to nationalisation's arguments. Most of the time, it boils down to the postulate that governments are bad owners/managers...

A good example is given by John Gapper in the FT:

FT.com / Columnists / John Gapper - Nationalisation is not a panacea

The fact remains that governments are bad owners for banks, as anyone who has followed the history of Germany's regional state-owned banks can attest. They are heavily conflicted because, although politicians like to castigate bankers for risk-taking, they also push them to lend freely in order to make the voters happy.

But in the first part of his paper, he makes at length the case for the nationalisation. And, at the end, he even shows that only the nationalisation of the overall financial system would make sense:

Prof Buiter argues that one clear benefit of nationalisation is that it would eliminate the uncertainty over how to value troubled assets taken from the balance sheets of banks. Any government that owned both "good bank" and "bad bank" could value them as it wished.

In practice, that would only be true if the entire global banking system, complete with all mortgage and asset-backed securities, were nationalised. Sweden could value Swedish property loans as it saw fit in the 1990s, but global finance has taken that luxury away.

To be honest, he has a point when he underlines the sheer size of the task:

More specifically, the costs of a full public recapitalisation of banks in the US or UK, in addition to the public ring-fencing of their troubled assets into state-controlled "bad banks", would be enormous.

This is particularly true of the US, which cannot just acquire a few large banks, like the UK or Sweden, and be satisfied that it has dealt with most of the banking market.

The plan being mulled by Barack Obama's new administration and the Federal Deposit Insurance Corporation to corral bad assets into a vehicle like the Resolution Trust Corporation, which took Savings and Loan assets in 1989, could cost $1,000bn.

Then consider that the top 10 US banks, which are now regarded as short of capital, have equity of about $800bn. Nationalisation of only these banks, complete with recapitalisation, could bring the bill to the taxpayer to more than $2,000bn, which puts the $350bn left in the Treasury's $700bn troubled assets relief programme into a very sobering perspective.

This is certainly true, but, given the situation, it would be even harder (and costlier) for the banks to find these huge amounts of money on the market...

 

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Wed Jan 21st, 2009 at 09:38:21 PM EST
Melanchthon:
To be honest, he has a point when he underlines the sheer size of the task:

I have heard the smaller banks, the low rollers, credit unions are doing fine, why take them over, most aren't asking for a bailout, if i understand correctly.

my guess the tricky part will be how do they compete with the government-owned banks?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Jan 22nd, 2009 at 03:37:39 AM EST
[ Parent ]
The government can repudiate all debt that it does not consider to be fair and above-board. It would not be unprecedented.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jan 22nd, 2009 at 04:40:07 AM EST
[ Parent ]

Why Are We So Afraid To Fix Banks The Right Way?
Henry Blodget | Jan 19, 09 8:57 AM

What's the right way?

  • Temporarily seize the banks
  • Write their assets down to nuclear-winter levels (or, if desired, put them in a big bad bank, as Sheila Bair wants to do.)
  • Convert enough of their debt to equity to put them in a strong capital position.

That's it.  No taxpayer money.  No citizen outrage.  No comical "Yes, we're lending" assurances when what the banks are really doing is, sensibly, hoarding everything.

We could do this to Citigroup and Bank of America tomorrow afternoon, and on Wednesday morning, two of our biggest banks would be rock solid (they could also still be publicly traded, under the same ticker symbols, with different shareholders).  The banks would have hundreds of billions of dollars of assets on their balance sheets that would be marked at or below market, and they could sell them for gains or hold them as their managers saw fit.  They would be liquid and able to lend.  They would have no reason not to lend because their assets had already been written down to the worst-case scenario. (Another plus: Management wouldn't have to lie about the value of their assets anymore).  Bank employees would still have jobs. Senior management would now be free to pay themselves whatever massive bonuses they wished--without doing it at taxpayer expense.  Sanity and fairness would have been restored.

The drawbacks?  It's hard to even call them drawbacks:

    * Today's common shareholders would get wiped out
    * Today's preferred shareholders would get wiped out
    * Today's debtholders would take a big hit, with unsecured debtholders ending up with equity stakes.

But wait--isn't that unfair? Arbitrarily deciding that shareholders and debtholders will get dinged?  Isn't that an abandonmnent of free-market capitalism?

Please.  These banks have already failed.  If it weren't for our having already abandoned free-market capitalism, they'd all have ended up like Lehman. Adults made bets on these securities on their own free will (on the apparent assumption that they come with implicit taxpayer guarantees). These adults can now, finally, accept responsibility for their decisions.

IMO, were government money involved, it should be directed first to those who had their retirement savings in the stock of their employer, especially if there was lack of options or coercion.  Next in line would be other small stock holders with funds invested in affected banks.  Put an FDIC type gurantee up to, say, $50K for other than net high worth individuals.

Unfortunately, Obama is likely to do this only after squandering more money on predictably ineffective solutions and only after it is the consensus that more donations to bankers is futile.  He probably prefers being ineffectual to being radical.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 12:19:17 AM EST
and it could be done in a few days

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jan 22nd, 2009 at 02:21:38 AM EST
[ Parent ]
I don't think fixing the banks' balance sheets by creating new government credit is remotely good enough. As asset prices fall, that only stops the credit bleeding from the wounds we can see.

The problem is the internal credit haemorrhaging of investor capital which we can't see. That consists of all of the credit created by the "shadow banking" that went on. Most of these declining credit balances are sitting overseas, and the debtor nations in the West are dependent on these creditors keeping their investments in the West.

ie here's the deal, Suckers, what we paid you with has just gone down the toilet, and we'd like you to keep on exchanging your oil for our deficit-based dollars and pounds. I think that creditors would only do that for want of an alternative. And I believe that there actually is an alternative, involving the direct connections of the Internet, and some lateral thinking.

Peer to Peer Investment - Unitisation -  changes not the Quantity of financial claims, but their Quality - and it will stem the credit haemorrhage by replacing much of the National Debt - ie that part of our current money = debt which relates to the stock of productive assets, which is not in circulation, and hence cannot be inflationary - with a National Equity.

Peer to Peer Credit - mutually guaranteed bilateral credit creation and Credit Clearing - gives the transfusion, and credit in circulation constitutes a shrunken National Debt.

In both of these dis-intermediated mechanisms, banks are no longer credit intermediaries putting their capital at risk, and become service providers.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jan 22nd, 2009 at 05:16:44 AM EST
[ Parent ]
Unfortunately, Obama is likely to only implement such a fundamentally radical solution well after he has tried fixing the banks as described above and found even that to be inadequate, and probably would do so only after such a program had been successfully adopted several times in the private sector.  Warren Buffet is probably a much more likely early adopter of such a system than is Barak Obama.  I like to style myself a "radical pragmatist."  I am prepared to accept changes that go to the root of the system provided they can be shown to work.

The problem with adopting your proposals is more that they would work than that they wouldn't.  In the process they would fence off a huge portion of the economy from the sort of "let the rich get richer quickly" schemes that have been the major feature of what has passed for economic policy in the USA and Great Britain.  

Such approaches will only be adopted when they can be sold to a significant portion of the population.  Few want to think sufficiently deeply to understand that what they have previously believed is a collection of noxious fables and "just so" stories fed to them since early childhood to lock in a world view whose chief virtue is the efficacy with which it has served the interests of the very wealthy.  Call it Paul Mellon's revenge--served very cold.

While things are likely to get bad enough for people to demand radical solutions, in such a situation pragmatic considerations usually lose out to more direct appeals to emotion.  In the USA this would likely take the form of some religious fascist distopia.  With such a prospect looming, a President  with Obama's skills and values may be able to negotiate a passage to such a relatively desirable option as that you describe as the least worst option, from the point of view of the wealthy.  That may just be preferable to being led by one who surrounds himself with snake eating geeks--or not.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 12:51:20 PM EST
[ Parent ]
to increase his anti-banker and anti-bonus rhetoric as they show that people (like elsewhere) hate - hate! - the bailout plans as gifts to the rich.

Mind you, it does little to get him to move away from neolib "reform"

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Jan 22nd, 2009 at 02:25:40 AM EST
Because there is no connection in most people's minds between the two.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 22nd, 2009 at 04:17:33 AM EST
[ Parent ]
I only hear talk about bankers not getting their bonus, no talks about changing the banks' management...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Thu Jan 22nd, 2009 at 05:05:19 AM EST
[ Parent ]
Now posted on Daily Kos.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Thu Jan 22nd, 2009 at 05:10:50 AM EST
WOW - on the DKos recommended diary list - I AM impressed!

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 22nd, 2009 at 09:42:13 AM EST
[ Parent ]
that in nationalizing the banks, we would be nationalizing their failure?  Why should the whole country take on its back the bankruptcy of these financial institutions?   At best nationalization of banks should be temporary, as the banks are eased out of existence, a la bankruptcy proceedings, which I think is more appropriate than nationalization.  Let new banks be created from scratch and let the old institutions rot.  

The government should be there to help those individuals and families who have been severely hurt by all of this--not to "make whole" those wealthy individuals and families who may have suffered a financial loss, unless that loss threatens to put them under a bridge.  

If the government is going to "save" banks and bankers, then it should be at a very stiff price.  Let them dine at soup kitchens.

by jjellin on Thu Jan 22nd, 2009 at 09:33:27 AM EST
is that we've ALREADY nationalized their failure: we are guaranteeing their losses, but getting none of the upside and no control.

It's amazing, but givne that the WSJ repeats the same fears, it's not so surprising:


Nationalization Fears Grow as U.K. Banks Struggle

The further step to nationalization -- in which the government would take over 100% of their shares -- wouldn't only be an embarrassment for Mr. Brown. It would saddle taxpayers with about £3 trillion (or about $4 trillion) in new liabilities, an amount far exceeding the country's annual economic output.

Furthermore, it would put the government in the position of deciding which companies should receive loans and kicking delinquent mortgage borrowers out of their homes. A government-owned bank also could hurt competition because customers might be more willing to do business with a sovereign institution.

"Nationalization is a last resort, almost as unpleasant for the government as it is for the shareholders," said Bruno Paulson, bank analyst at Sanford Bernstein in London.

Gah. Ideology. Propped by lies (the liabilities are already effectively on the government's books).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Jan 22nd, 2009 at 10:12:27 AM EST
[ Parent ]

Some more nationalization links, from the editors of investment website Seeking Alpha.

   
Buiter — Time to take the banks into full public ownership

   
Clusterstock — More Cries For "The Swedish Model" To Fix Banks, Why Are We So Afraid To Fix Banks The Right Way?


   
Cowen — Why bank nationalization is a last resort, Is the Sweden plan so much better?

   
Dillow — Arguing about bank nationalization

   
Drum — Kevin Drum Smackdown Watch, Nationalization Revisited, Nationalization


   
Fama — Government Equity Capital for Financial Firms

   
Fox — Why hasn't the government nationalized Citigroup? Hank Paulson's sort of answer, The case for nationalizing Citigroup and Bank of America, and getting Robert Reich a fact checker

   
Free Exchange — Why not nationalise?


   
Hempton — Nationalisation after due process

   
Jones — Nationalisation linkfest

   
Kedrosky — Bank nationalization: Why Are We Pretending?


   
Krugman — Wall Street Voodoo

   
Gaius Marius — nationalization now!

   
McArdle — Why not nationalize, like Sweden?


   
Quiggin — What to do with nationalised banks?

   
Salmon — The Urgent Financial Crisis Facing Obama, Insolvent Banks: Why a Debt-for-Equity Swap Won't Work, Felix Salmon Smackdown Watch, More on Bank Nationalization, Why Nationalization is the Best Alternative, Why We Should Nationalize Now, Nationalize Citigroup and Bank of America


   
Surowiecki — Nationalization will not be easy, Where would bank nationalization stop?

   
Yglesias — The grain


I also want to point to Stirling Newberry’s latest two pieces, which ably crucify President’s Obama economic policies. Here's the short version, from today.


And here's the long version, from yesterday. It is not for the feint of heart, nor for those with limited attention spans.


I also want to point to Stirling Newberry’s latest two pieces, which ably crucify President’s Obama economic policies. Here's the short version, from yesterday.


And here's the long version, from two days ago. It is not for the feint of heart, nor for those with limited attention spans.

by NBBooks on Thu Jan 22nd, 2009 at 10:15:55 AM EST
Thanks!

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Thu Jan 22nd, 2009 at 10:18:37 AM EST
[ Parent ]
Newberry, my brother: "The structure they proposed is out of Plato's Republic." Bwah! That's what I thought about mid-term PoliSci 101. Bwahahahahaha. Incidentally, here is a totally fabulous tool for translating "classics." I discovered it because of a comment DoDo made linking ASTROLOGY and MISSILES. Too funny.

One last leap: Newbury links S-curve to aerospace technology R&D. That's all well and good example of "classic" marketing strategy. I was impressed though by the visual aid below, a NYT reprint published by visualizingeconomics.com, just because it's a collection of predictable "breakthroughs" and market saturation ("plateau") that inevitably precipitates "expansion" into "emerging" markets. Newberry's most excellent polecon observation: "We [G20] are, today, in this inuauguration moment, at a pinnacle of consumption. " That would be the heel of the curve, at the pinnacle of distributing "classic" democracy and innovative, complex financial products. Worldwide. LOL.


Watch Geithner for epic fail.


Diversity is the key to economic and political evolution.

by Cat on Sat Jan 24th, 2009 at 12:24:46 PM EST
[ Parent ]
Bloomberg.com: Bank Nationalizations May Not Trigger Default Swaps
Governments would need to take over all the assets of a bank and take charge of daily operations for a nationalization to trigger payouts on credit-default swaps, according to Bank of America Corp. analysts.

Simple nationalization wouldn't be enough to settle the derivatives, which protect investors against a company defaulting on debt repayments, New York-based strategist Glen Taksler wrote in a note today. A collapse in share prices of New York-based Citigroup Inc. and Royal Bank of Scotland Group Plc is stoking speculation the U.S. and U.K. will be forced to take full ownership of some financial institutions.

"It's worth noting the high threshold that would be required for bank nationalization to trigger credit-default swaps," New York-based Taksler wrote in the note. "Simply taking a substantial ownership stake through equity is not enough."

Events last year provide a guide to what may have to happen to trigger payouts on the contracts, Taksler wrote.

In the U.K., the nationalization of Northern Rock Plc in February 2008, which had the first run on a British lender in more than a century, didn't prompt payments on credit-default swaps. This was because the government took over the bank's equity and not its debt, agreed to manage it at arm's-length and stated the institution was solvent, the note said.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Thu Jan 22nd, 2009 at 10:18:15 AM EST
  1. Just because nationalisation might be a good policy given Britain's constraints does not mean that it is a good policy for America whose immense political assets provide it with options that other countries just don't have -- namely the ability to redistribute wealth worldwide for its own benefit.

  2. Although started due to a banking crisis, the current recession is now continuing because of a massive decrease in aggregate demand, not because banks are having trouble lending, so no solution to banking, even if it is indeed still broken, which I doubt, will help us get out of the worldwide recession any sooner. (Another way to think about this is that if housing prices suddenly went up, the banking crisis would also be over.)

Krugman and Buiter, early proponents of the more aggressive form of TARP that led to injecting state funds directly into the capital stocks of banks (and is now sitting in vaults to maintain high capital ratios), are still operating as if fixing banks will somehow fix the recession, when only massive public works spending can now do that.  The reason? No market exists for capital -- markets are illiquid, and they will remain illiquid until aggregate demand for goods and services increases -- the classic Keynesian scenario.  So it is foolish to analyze banking balance sheets as if markets for their products were functioning, as both seem to do in their discussions of how to price illiquid assets. (No price is needed: government just needs to settle on negotiated payment that seems fairest to all parties just like it does all the time in property condemnation proceedings for illiquid real estate -- this isn't new stuff here.) In financial economics, Nobel laureate Krugman is somewhat out of his specialty, so he's as smart as any other economist on this topic (okay, maybe a little bit smarter), but Buiter is one of the world's leading financial gurus and has been saying the opposite until this last article, so his misunderstanding smacks of outright panic, especially when his reasons are so sparse. (Which again leads to the question of why, if the problem is American in origin, is Europe so affected by it?  Sounds like classic political dependency to me.)

A key point of their arguments that seem to be missed by many comments here is that Krugman, correctly, is not advocating nationalisation of banks that have not become insolvent, which is still the vast majority of banks, and the FDIC already nationalises and liquidates insolvent banks, and has already done so since the crisis began, so new policy in the US is not needed. He is just advocating not subsidizing banks any more. (I don't know enough about Britain's experience, but are most banks actually insolvent now in Britain?  Buiter's piece makes one think they must be.) But neither of them have provided any explicit argument that nationalising banks will end the recession sooner, which is the only thing policymakers should be concerned with right now.  

by santiago on Thu Jan 22nd, 2009 at 10:45:48 AM EST
The maasive increase in aggregate demand is only happening because companies don't have the confidence or the credit to invest, and are instead cutting back on costs - which means trimming workforces, which in turn means that employees are paying down debts and saving rather than spending.

None of this is inevitable. Loosening lending will go a long way towards fixing it, and since private banks would rather waste cash on end-of-the-world bonus payments than lend it sensibly, government intervention is the only rational option.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 12:50:20 PM EST
[ Parent ]
increase decrease
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 12:50:53 PM EST
[ Parent ]
That's how it started -- lack of counterparty confidence to lend, which is why Tarp was a good idea at the time.  But we're way beyond that now. Personal savings has skyrocketed everywhere, which means that individuals all over the world are in fear of losing their jobs, and many of them will, so they rationally reduce spending.  Same for businesses of all kinds except repo men. Fixing banks won't help until people can be assured of income stability.  

Looseninig lending would go a long way toward helping that, but it is not a sufficient, or even necessary, condition any longer.  Also, except for economists, political authorities of all stripes are calling for more conservative lending, as well as most people commenting here.  That means high capital ratios like we have now, and high lending criteria even under government management.  Only a re-establishment of markets for money and credit through increasing confidence in future income streams can solve the crisis at this late stage.

by santiago on Thu Jan 22nd, 2009 at 02:28:27 PM EST
[ Parent ]
The systemic problem is that markets are inherently manic depressive and incapable of rationally assessing future risk.

During boom times of irrational exuberance bad companies are funded because risk is underestimated.

During recessions of irrational pessimism and paranoia, good companies aren't funded because risk is overestimated.

Neither is optimal.

These boom/bust cycles are a kind of social illness - an economic plague which reappears cyclically.

Rather than trying to recreate traditional forms of banking, which at best are only barely stable and are likely to react to the present situation by being excessively conservative, what's needed is a distributed organic economy in which credit isn't monopolised and parasitic speculation is illegal.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 06:32:26 PM EST
[ Parent ]
Although started due to a banking crisis, the current recession is now continuing because of a massive decrease in aggregate demand, not because banks are having trouble lending, so no solution to banking, even if it is indeed still broken, which I doubt, will help us get out of the worldwide recession any sooner. (Another way to think about this is that if housing prices suddenly went up, the banking crisis would also be over.)
True, and very artfully phrased.  But what caused the banking crisis?  It would appear that it was caused by a massive and unsustainable increase in real estate valuation that was enabled by a loose money policy combined with rigorous "see no evil" regulation at the Fed and at other regulatory agencies, especially since 2002. (Another way to think about this is that, were we only able to get the bubble to "un-pop" all would again be well.)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 01:37:17 PM EST
[ Parent ]
I agree with your diagnosis.  However, it's not actually necessary to address the cause to solve the current problem.  To illustrate with another example, the cause of the disastrous invasion of Iraq was that George Bush happened to be president.  But now that he is no longer president does not mean the problem is solved. Only eventual withdrawal of forces and a stable Iraqi political environment will solve the problems that resulted from the invasion.  Same goes for the worldwide recession today.  Banks may have caused the problem, but that's water under the bridge at this point because banks are not the ones precluding a solution to the problem -- individuals too fearful to spend are.
by santiago on Thu Jan 22nd, 2009 at 02:34:16 PM EST
[ Parent ]
actions have irreversible conseuences.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jan 22nd, 2009 at 05:06:16 PM EST
[ Parent ]
I agree with your diagnosis.  However, it's not actually necessary to address the cause to solve the current problem.
True again.  But addressing the cause is important if we are to at least delay by 50 years repeating the actions that brought us to the current problem.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 05:49:22 PM EST
[ Parent ]
Agreed.
by santiago on Thu Jan 22nd, 2009 at 05:59:07 PM EST
[ Parent ]
Problem is, they counted the rentals for the smoke machine and all the mirrors as part of the GDP, then stiffed the company who rented it and counted the legal fees as part of GDP. And when the company went out of business, they counted bankruptcy court payrolls as part of GDP. And when the next company bought their assets, they found that the smoke machine was sent back to China, and the mirrors were all too broken...but they found ways to count the shipping costs and the insurance auditors invoice as GDP.

There's more trillions gone than there is production in the world, it was part of our great GDP, but it still is a debt to someone.

There's no emollient left to make a bubble with. But note, the USians just took delivery of a new aircraft carrier on 10 Jan
($6.2 billion), they've another in production (only $5.1 billion) and dumped nearly $400 million onto Northrop to start designs on the next one. So things must not be really all that bad. Why do we need a banking system when we has gots the aircraft carriers. Your Industry New

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Thu Jan 22nd, 2009 at 09:01:38 PM EST
[ Parent ]
BBC NEWS | UK | Minister's bank comments disowned

A government minister's suggestion that some bank executives have been "grossly over-rewarded" is not a view shared by the chancellor, the Treasury has said.

In an interview with the Times, City minister Lord Myners blamed banks for their part in causing the recession.

He said executives had "no sense of the broader society around them" and the "golden days" of big bonuses were over.

A spokesman said these were Lord Myners' private views, and were not the words of the chancellor or Treasury.



Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sat Jan 24th, 2009 at 09:41:35 AM EST


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