Paul Krugman, Brad DeLong, and Matt Yglesias are all endorsing the Swedish plan for partial bank nationalization. Maybe it’s better than what we’ll get (I haven’t read through the latest draft), but I don’t think they are addressing the weaknesses of the idea. Namely:
1. Solvent banks don’t need to be nationalized. Insolvent banks should be shut down. Maybe they’re mostly insolvent, but that is second-guessing market prices just as much as Paulson’s view that bank assets can be bought on the cheap. The implicit view is that current equity markets are overvaluing these banks. (It is complicated, however, because current equity prices are not independent of the government plan and there can also be hovering in the neighborhood of insolvency.) An alternative proposal, of course, is to reveal which banks are solvent and which are not.
2. There is much talk about taxpayers participating in the upside. First, bank ownership is probably not an efficient way of redistributing wealth (is it what you want for Christmas?). Second, Greg Mankiw’s friend scored a telling point:
would all be better off if high schools taught the Modigliani-Miller
theorem. MM implies that the price of the asset (again,assuming the
auction gets it right) will adjust to offset the value of any warrants
Treasury receives. In this case of a reverse auction, imagine that the
price is set at $10. If Treasury instead demands a warrant for future
gains of some sort, then the price will rise in the expected amount of
the warrant — say that’s $2. Then the price Treasury pays for the
asset will be $12. Some people might prefer to get $12 in cash and give
up a warrant worth $2 in expected value. Fine, that’s a choice to be
made. But the assertion that somehow warrants are needed is simply
I haven’t seen a good response.
3. Swedish governance is in many ways of higher quality than American governance. It involves lower transactions costs, more social unity, and it is more inclusive of many different interest groups. For one thing, the concentration of wealth in Stockholm makes it harder to use policy to redistribute wealth across regions. Instead they redistribute wealth across genders and age groups but those forms of redistribution don’t distort the banking system so much. The Swedish banking system is also "small as a whole" compared to surrounding markets; you can’t say that about the USA. Note also that Swedish banks, circa the early 1990s, were simpler creatures than today’s American banking firms.
4. The U.S. doesn’t have any tradition of successful nationalization. We’ve had plenty of interventions, but for whatever reasons nationalization has not been the preferred model. I don’t think it is just ideology. The diffuse and highly federalistic American political system is lacking in accountability and thus it is poorly suited for such policy actions.
5. Nationalization makes it harder to raise private capital next time there is a crisis. It is a high time preference solution.
6. Presumably the government wants to show it is doing a good managerial job, but in fact the sector needs to shrink. And would a government-owned bank cut off the flow of credit to, say, Chrysler?