No, not that N word, the other N word. Nationalize. As in nationalize a financial institution here and there.
Do you know how Paul Krugman is following the TED spread as an indicator of current financial troubles? I’ll be following how many times the N word pops up in Google News. Right now the top mentions all concern other countries, of course including Northern Rock in Great Britain. So far this is the closest I’ve found to hints of nationalization for the United States; in the blogosphere Nouriel Roubini is saying nationalization is better than bailouts.
The Swedes, of course, nationalized Nordbanken, their #2 bank at the time, in the early 1990s, during their financial crisis. They also nationalized Gotabanken and supplied funds to several other institutions. The belief at the time was that loan liquidation would have been even worse. And since Nordbanken was on life support anyway, and the government had to limit systematic risk by paying off creditors anyway, why not just control the bank directly? The bank was subsequently re-privatized. You’ll find more background on the Swedish experience here. Of course in these situations none of the options are pretty. But keep in mind that the Fed (and ultimately, the taxpayer) is already residual claimant on the Bear Stearns deal and then read Mises on the dynamics of interventionism.
There are many things we do not do as well as the Swedes. In any case, if use of the N word remains spotty or non-existent in the U.S., you’ll know that things are going OK, at least relative to what might have happened.
Addendum: Brad DeLong has much to add, including some policy recommendations. Arnold Kling doesn’t agree.
Here is something I’m wondering: Could a nationalized bank theoretically out-perform market banks because it could likely get around the huge regulatory environment surrounding finance and banking in the US? I suppose you’d need the “right people in charge”, but it doesn’t seem as far-fetched as a nationalized computer industry, for example. The products and services offered by most banks already seem very homogeneous, I believe due to heavy regulations.
I guess I could ask the same question about health care.
Well, if you consider money is just a commodity, why do we need 8,000 banks offering the same commodity at the same rate? But if you want a loan, you better be part of the right political party. Russian finance, anyone?
If we nationalize, we must amend the civil service laws to allow the newly nationalized bank to pay for talented people to maintain comfortable lifestyles in Manhattan.
Of course nationalization is better than bailouts. Moral hazard, anyone? I sincerely hope that the current crisis doesn’t play out like Sweden 1991 (but it sure as hell looks that way -collapsing housing markets, risk poorly priced, cascading margin calls, banks crumbling). The krona hasn’t really recovered since 1991. That is likely to happen to the dollar, too.
How about doing neither: don’t nationalize and don’t bail out. Bear Stearns is not a bank. There’s no danger, therefore, of a bank run. What we should worry about is a contraction of the money supply and Bernanke already has the tools to prevent that. He should let investors take their losses, making clear he won’t bail them out, so we can move on. I say this as someone who lost one $4,000 on one mortgage lender stock in the last 2 weeks.
Roubini makes a strong case, I think.
We aren’t sure what the inflation rate is, or the real rating of any bond; we don’t know which financial institution is on shaky ground until after they collapse, we can’t buy insurance to cover defaults…
How can anyone plan a business deal in this country?
I don’t think what happens to Bear Stearns is that important in perspective.
On the bright side: they’re running ads here in Florida for mass auctions of foreclosed homes, and the starting bids seem to be about a third of the appraised prices. That should give us some data we can use.
Bill Stepp,
Krugman has sometimes exaggerated his role in developing cetain strands of thought. But in the area of currency crises,
his claims are pretty justified. this is the area of economics where Krugman did his earliest and most innovative work.
Barkley,
I didn’t say PK didn’t make a contribution to this field, or that his work had no value, or that he didn’t help develop it. I merely stated the simple fact that he didn’t invent it, which would be a much stronger claim.
The word Krugmanesque should enter the lexicon. It would describe some of what politicians, and evidently at least some economists, say.
And if only people who had experienced real gravity back in the 1300s were around when my high school teacher told me about so-called “Newtonian” mechanics.
In Germany, Ackermann, CEO of Deutsche Bank (the most famous German bank, I think), asked government to swallow up the financial losses due to the housing bubble, even if the financial institutions are well grounded and could take it by themselves.
Essentially, what this advocate of “marketism” wants is that all the people of Germany have to pay the bill for his company malinfesting… So much for corporations being evil users of free-markets, they are rather frequent users of government to limit their own risks.
I like cats.
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