Why not nationalize?

by on September 30, 2008 at 4:45 am in Economics | Permalink

Megan McArdle piles on:

…what works in the banking system of a small economy does not
necessarily work in a large one.  For starters, no offense to the
Swedes, but very few other countries are affected by what happens in
their economy.  One family, the Wallenbergs,
indirectly controls something like 30-40% of Sweden’s GDP.  Even now,
the Swedish financial system is considerably less broad and complex
than that in the US; it’s not a world financial center.  And in 1992,
everyone’s financial system was a whole lot less complicated than they
are now…

Possibly the biggest problem with this plan,
among many, is that Sweden is essentially able to command the labor of
its bankers; they have relatively few alternatives without starting
over in a new country and a new language.  American government has no
such leverage.  Yes, the folks in the mortgage departments royally
screwed the pooch, but running a major bank is not something you can
hand over to a GS-17.  Nor is it a job for academic economists. 

And,
of course, the political ramifications in the United States are very
disturbing.  A small homogenous country with a parliamentary system and
a lot of social capital invested in the government is going to do
better at nationalizations than we will.  The fractious structure of
the American legislative system means–as we’ve just seen–that huge
amounts of political maneuvering and log-rolling will go into the
running of any national banking system.  Imagine the banking system run
by the Department of the Interior.

…The problem with
the Japanese system (or at least, one major problem) is that for
political, social, and career reasons, banks kept pouring money into
zombie firms, trying to salvage the bad loans of a decade ago.  Is a
nationalized banking system less or more likely to do this than a
private one, in America?  I imagine any banking head, appointed
or career civil service, would get a lot of calls from Senators and
congressmen demanding that the bank prevent companies in their
districts from going under.

There’s lot of talk in the blogosphere in favor of the Swedish plan, but not much consideration of its drawbacks. 

1 matt wilbert September 30, 2008 at 7:30 am

Perhaps banking shouldn’t be left to GS-17’s, but bankers don’t appear to be really good at it either.

All plans have drawbacks; that doesn’t mean one plan isn’t better than another. It may well be that the Swedish model isn’t valid for the US, but the Paulson-Dodd-etc. plan has no model at all. It is completely ad hoc and without any basis to believe it would work, and really without sufficient detail to understand what the government would actually be doing.

2 Tom September 30, 2008 at 8:54 am

“Your average Swede speaks better English than your average Republican vice-presidential candidate.”

And er, ah, maybe, uh, your current Democratic presidential candidate.

3 spencer September 30, 2008 at 10:50 am

It goes back to the very, very old wall street bromide that the most dangerous thing in the world is an intelligent banker.

4 T. Shaw September 30, 2008 at 11:42 am

It is not the end of the world as we know it. Close.

The Buffett deal is good for Buffett. It demonstrates how capital destitute Goldman was.

Point of information: In 2004, the SEC 2004 lowered/waived investment banks’ (primary broker dealers) leverage (debt to equity) rule to go from 12:1 to 40:1 – only five largest received ‘waiver’: Bear Stearns (defunct – $30B cost taxpayers); Goldman (now a BHC); Lehman Bros. (bankrupt); Merrill Lynch (sold at huge loss to shareholders); Morgan Stanley (now a BHC). Intellectuals: BHC = bank holding company, not big hep cat. Whatever risk Goldman or any of these posed to the taxpayer was not identified in 2004.

Here is what the Buffett deal does. It screws Goldman common holders and impairs earnings retention ($5 billion isn’t material to total Goldman capital?). The 10% dividend impairs earnings retention/capital accumulation. His $5 billion is ahead (in liquidation and dividends) of all the common shares. We saw these types deals in troubled S&L’s in the ’80’s. That was fun.

The FDIC has been around and doing these types of deals for 75 years. They got through Carter’s hyper-inflation and Volcker’s 20% prime rate; the 1980’s ag and energy crises wherein nearly a thousand (smaller and not Wall Street broker/dealers who aren’t insured anyhow) banks failed; the LDC debt crisis, the S&L (RTC bailout) crisis; the 1990 New England RE melt down and bank crisis; and they’ll get you through this one.

What really saddens is that after all these crises, we get this massive financial cluster fuck.

5 OB September 30, 2008 at 1:36 pm

happyjuggler says “Put it all together and I see absolutely no reason to think the “Swedish method” has anything positive to add to what we are already doing.”

The Swedish model is a form of pre-emptive strike – the FDIC currently only moves in when banks are already insolvent, smoothing the process of reselling assets, etc. The Swedes went in and preemptively bulked up the equity of banks that were solvent but vulnerable due to the ongoing crisis. In the present case, unless something is done preemptively, the FDIC will be overwhelmed, the crisis will be prolonged, and the broader economy more adversely affected.

6 Zamfir October 1, 2008 at 4:04 am

I am wondering, where is this mythical land where American bankers go to when they are fed up with the government? And where Swedish bankers are apparently not allowed?

7 nike dunks May 25, 2010 at 4:07 am

I am wondering, where is this mythical land where American bankers go to when they are fed up with the government? And where Swedish bankers are apparently not allowed?

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