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experts push to nationalize u.s. banks

February 25, 2009

There was an interesting article in the Sunday edition of the Detroit Free Press regarding the idea of temporarily nationalizing U.S. banks. It seems that even the champion of free market capitalism, Alan Greenspan, thinks that it may be necessary. This should be one hell of a wake-up call to everyone who thinks that the financial market will be able to fix itself this time:

WASHINGTON — Former Federal Reserve Chairman Alan Greenspan thinks it’s necessary. His successor, Ben Bernanke, doesn’t rule it out. From editorial pages to the blogosphere to boardrooms, this is the question on many minds: Should the United States nationalize some banks?

A few months ago, it would have been heretical to suggest that Bank of America could become Bank Owned by America.

Now, however, the U.S. economy is sinking faster than anyone thought possible, and respected economic authorities are suggesting that temporary bank nationalization could be the best solution.

Views of Greenspan, Bernanke

“It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring,” Greenspan, the long-revered sage of free-market theory, told London’s Financial Times in an interview published Wednesday. “I understand that once in a hundred years this is what you do.”

When Bernanke was asked whether he shared his predecessor’s views, he didn’t distance himself from them during a question session Wednesday at the National Press Club. He answered as if nationalization were inevitable — after first listing some of the problems it would entail.

“Well, I think as a general rule, it’s very challenging for governments to manage banks for a protracted period. And there’s the additional problem that if you have a government-run institution, that you tend to lose the franchise value,” Bernanke said.

“So I think whatever actions may need to be taken at one point or another, I think there’s a very strong commitment on the part of the administration to try to return banks or keep banks private or return them to private hands as quickly as possible.”

The term “nationalization” conjures images of the communist Soviet Union or corrupt Latin American dictatorships, but advocates of nationalizing U.S. banks envision a seizure of big banks on the grounds that they already are insolvent except for some accounting sleight of hand.

Banks are sitting on trillions of dollars worth of complex securities, backed by U.S. mortgages that are going into default as more homes are now worth less than the mortgages on them.

If banks were forced to put present-day values on these securities instead of hold-to-maturity values, their liabilities would far exceed their assets. They would be insolvent.

Seizure, surgery, sale

What’s needed, nationalization advocates argue, is for the government to seize Bank of America, Wells Fargo, Citigroup and other large banks, carve out their bad assets, then break them into smaller pieces for quick sale to the private sector.

“Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume,” Nouriel Roubini, a prominent New York University economist, wrote in an opinion piece Feb. 15 in the Washington Post. “Of course, the economy would still stink, but the death spiral we are in would end.”

Other analysts think that nationalization is all but inevitable.

“It’s very hard when you get to this point not to do that,” said Adam Posen, the deputy director of the Peterson Institute for International Economics, a free-market research center.

Posen said he thinks that nationalization is losing its stigma, and he envisions scenarios in which the government could seize the nation’s 50 largest banks.

It’s inescapable, some say

Most depositors would be safe, since their deposits are insured up to $250,000. Stockholders probably would be wiped out, and bondholders eventually would get shares of any new company.

The government could even make money on some seizures, if history is any guide.

Roubini and Posen said they think that a bold, drastic step is inescapable, and that a failure to take it now would only make it costlier and more difficult later.

Today’s problem is the $1.2 trillion in assets whose underlying collateral is shoddy subprime mortgages, which have eroded faith in the broader U.S. housing market. For now, the Obama administration is mum on nationalization.

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