The Banks

by Brien Jackson

Strictly speaking, I favor the nationalization approach to the banking system. It’s really hard to imagine a TARP-esque program working at this point, and it seems like a large scale receivership for teetering institutions is, if not the best, the least bad idea at this point. But, that said, I think many of the ideas proponents, most notably Krugman, are being a bit too sanguine about the downside, and the political difficulty, of such a plan. Kevin Drum sums up many of my worries:

Aside from the nitpicky point that the United States actually has one of the least oligopolistic banking sectors in the developed world, what’s being argued here?  That we should let the existing banks fail?  That we should temporarily nationalize them?  Which ones?  And if we do, how should we treat all their creditors and counterparties?  That’s the big question (not whether shareholders should get wiped out — of course they should, but they’re mostly wiped out already), and it doesn’t go away just because we nationalize TitanoBank instead of shoveling cash down its gaping maw in return for preferred shares.  In fact, it makes the question even more salient, since in a post-nationalization world Uncle Sam would be legally on the hook for all those claims.

As for the cost of all this, we might as well suck it up.  We’re way beyond the point of thinking we’ll get out of this mess without spending a trainload of taxpayer dough one way or another.  This debacle is going to cost us hundreds of billions of dollars no matter what we do.

I certainly respect guys like Atrios and Krugman as economists, but I think it’s important to remember that economists aren’t necessarily extremely well versed in the intracacies of the American financial system. At this point, I’m not really sure anyone is. Because of that, I think it’s worth reading everything with a bit of skepticism. And at this point, there’s really no way around the simple fact that whatever we do is going to suck. It’s going to be difficult, protracted, and it’s going to cost a lot of money. It’s not really a matter of Tim Geithner or Barack Obama simply declaring that we’re going to take over the banks and everything coming up roses. And the real downside to this scenario is that the government still winds up holding the bag on all of the toxic assets and other parts of the banks we can’t sell off, or, in other words, we’ll be nationalizing all of their debt.

Still, it does seem to be the least bad of all of the options on the table, and it seems important that the administration find a way to do it as soon as possible.