Nationalize the Banks! We’re all Swedes Now
By Matthew Richardson and Nouriel Roubini
Sunday, February 15, 2009; B03
The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is nationalization.
As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late.
The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion — including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans — is at risk of losing much of its value.
Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.
. . . The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms also would be instituted to reduce the chances of costly future crises.
In 1992, the Swedish government took over its insolvent banks, cleaned them up and reprivatized them. . . Sweden’s restructuring agency was not an out-of-control bureaucracy; it delegated all the details of the clean-up to private bankers and managers hired by the government. The process was remarkably smooth. . . Basically, we’re all Swedes now. We have used all our bullets, and the boogeyman is still coming. Let’s pull out the bazooka and be done with it.
Richardson and Roubini want to nationalize the failing banks (however they might choose to decide that) and I want Washington to create a Federal Bank system parallel to the quasi-private banking system from which we currently suffer and let the market determine who survives.
But we’re on the same page.
Having said that, we are not Sweden; Sweden can manage its country and we are far beyond managing ours. That’s why I favor letting fragile and fraudulent banks fail in a live-by the sword, die-by-the-sword manner. I simply no longer trust such a well-paid and well-paid-off Congress as ours to find equity in the dark closets of their deliberative process.