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.

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

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

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

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.

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

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."

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

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

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.

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.

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

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.  

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.