Why bank nationalization is a last resort

Banks don't function well at low levels of capitalization, so there is a strong and understandable tendency to want to "do something."  Everyone says nationalization is not intended as a long-term solution but the question is whether government ownership will succeed in building up a greater capital cushion for the banks.  If the environment for banking is not favorable, it won't and banks will have to stay nationalized.

How many years of profits are needed to create the cushion of capital which is required for re-privatization?  And how many years of government ownership will be needed to generate that many years of profits?  Will banks owned by the government be allowed to pursue profits, rather than lending to troubled industries in the districts of influential Congressmen?  Or will government just stick money in the bank and hope they have thereby created a sound enterprise?

You might take the line: "Government is bad at running bail-outs, but it sure is good at running banks," but of course that's a tough sell.

Those are the questions you should be asking.  Admittedly the alternatives to nationalization don't currently look so great either.

Kevin Drum adds some good points.  Felix Salmon offers ongoing coverage.


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