Greenspan favors nationalization
February 18, 2009, 11:39 am
Posted by Eduardo Peñalver
Alan Greenspan, former acolyte of Ayn Rand, comes out in favor of (temporary) bank nationalization. (HT Paul Krugman)
That’s rule #5 in the Communist Manifesto.
In the light of Kathy’s comment, I guess we have to call him Alan Redspan. As the article notes, Republican Senator Lindsey Graham is a fellow traveler.
Of course, Marx would have been in favor of permanent nationalization of the banking system, not temporary nationalization to save it.
I am by no means a Marx scholar, but I wonder if he wouldn’t have seen the current crisis as an example of capitalism’s internal contradictions causing its downfall. For the sake of my ever dwindling 401k, I am hoping capitalism survives and the economy comes roaring back to life.
Clearly capitalism’s internal contradictions caused the downfall. What Marx predicted was that these contradictions would increase in size and intensity as capital monopolized. Whether he was right in this or not we shall have to see.
But we nationalize banks all the time. We have been doing several a week for months. It’s just that if Joe’s Bank and Grill in Bugtown IA fails and is “eated” by the FDIC, no one cares. But if B of A failed, then a lot of really important people would lose their jobs and credibility and since it’s all about them, people begin to worry.
Income tax was also a temporary measure.
Obviously there’s an emergency situation, but I think it would be smart to be clear about what “temporary” means, and stick to it.
Kathy,
I’m curious — what exactly would be your objection to permanently nationalized banks. And how on earth could we be clear about what “temporary” means in this situation? Should the government have to promise it will sell back every bank it nationalizes within two years, no matter what happens to the economy between now and then?
I don’t see how nationalization would work. There are around 8,000 banks in the US and the government does not have the ability to nationalize all of them. This means they would have to select only a few banks to prop up, which would cause a run on the remaining banks that are not being nationalized. I could see a situation where the government sets up a bad bank to buy toxic assets without nationalizing any banks.
Anyway, Greenspan is talking about short-term nationalization, not setting up a South American nationalization plan. Short-term nationalization has been done before in the US (see the fallout from the S&L situation).
Eduardo
I am pleased to see that someone on this board is finally beginning to address what is rapidly becoming the biggest social issue of our times. The problems of the economy are as serious or perhaps even more serious than what was experienced in the 1930′s, yet for the general public there seems to be little understanding that things are not going to get back to “normal” next year or for that matter for many years in the future.
As for the banks the only solution is a radical restructuring similar to what was done to public utilities in 1935. This may require temporary nationalization. It will certainly require a restoration of Glass-Steagall or something akin to it. Ultimately banks will be prohibited from engaging in any activities other than straight banking – no investment banking, no securities underwriting, no brokerage activities and above all no more conduits or SIV’s.
Solutions like this are not socialism. Rather they would work to restore the self regulating aspect of the market. So if it takes nationalization of the banks this is something we should welcome.
Matthew,
I know almost nothing about economics. Mostly I just happened to recall seeing this point in The Communist Manifesto.
But anyway I’m not crazy about the idea of our government holding money or consumer paper. Banks seem to have the idea of reckoning in their DNA, while governments seem to be quite literally reckless.
Bank CEOs apparently know that somebody is going to have to pay. Governments sometimes just print money.
No nationalization if it means take over. “prop up’ is and will stay be in play. Forget Marx.. He would not know about CDOs Swaps, derivitives etc. He would be more confused than we are.
How to ameliorate the down ward spirial? It is an art so all to do is wait till see if the ‘stim’ will work.. ‘Free market’ types say do nothing and watch the economy crash as God/and the intrinsic/unchangeable market forces intends..[sounds Marxist to me!]
Enforcement?.. keep Guantanimo open for Wall Street ponzis. Re-OK waterboarding for asset searches only.
“I don’t see how nationalization would work. There are around 8,000 banks in the US and the government does not have the ability to nationalize all of them. This means they would have to select only a few banks to prop up, which would cause a run on the remaining banks that are not being nationalized. I could see a situation where the government sets up a bad bank to buy toxic assets without nationalizing any banks.”
I don’t think that anyone outside of the Right is talking about the nationalization of all of the banks. The government would nationalize the insolvent banks. This would not be controversial if some of the insolvent banks were not in the hands of politically powerful people. And there would be no run on the remaining non-nationalized banks. They would avoid nationalization precisely because they are solvent.
I don’t think that anyone is talking about permanent nationalization either. Insolvent banks are either taken over directly or transferred to the control of solvent banks. When the insolvent bank becomes solvent again, it is sold. This is how it has always been done.
The problem here isn’t even so much the spectre of nationalization. It’s the fact that banks will have to have their assets scrutinized, which is to say, priced to the market. Right now many of these banks are holding assets at their top prices, not their current prices. At top prices, these things are assets. At current prices, they turn into liabilities. The thing is, this happened in Japan. The government was unable to get the banks to properly price their assets (also in mortgages and real estate backed loans) and their recession lasted an entire decade. We don’t need that to happen here.
So what exactly does it mean to “nationalize the banks”? What precisely happens when a bank is nationalized? There seem to be several different definitions/solutions assumed. e.g. does it mean the banks go into bankruptcy, are protected from creditors and run by the bankrupcty courts? Does it mean that a Resolution Trust Corp is created and funded by the Federal govt to buy up the toxic assets? Does it mean more Federal regulation? Does it mean some extra-bankruptcy-court procedure whereby the government takes possession of the banks assets and assumes responsibility for its continued operation? Some combination of the above?
Here is Nicholas von Hoffman on “ghost banks”, or as they’re sometimes called, “zombie banks”, and the Japanese experience:
http://www.thenation.com/doc/20090302/howl?rel=hp_currently
Kathy, you are operating on incredibly outdated assumptions. The following statement proves it:
“Banks seem to have the idea of reckoning in their DNA, while governments seem to be quite literally reckless.”
If banks had ANY IDEA of reckoning whether in their DNA or just in a few skin cells, we would not be where we are at this point in time. This whole crisis is about banks doing literally anything they can to avoid the idea of reckoning by, as Unagidon states, actually valuing what is on their books. Because if they did that they would have to admit that they are insolvent, and nationalization would probably be a best case scenario.
Barbara, I think bankers know someone is going to get left holding the bag, but also know it won’t be them. That’s one or two steps past government thinking. And I’m pretty sure this is the nature of the two beasts.
Unagidon
You are correct. Not all the banks would have to be nationalized, only those that have required government funds to remain solvent and these are mainly the big bank holding companies. I suppose nationalization for these banks would be roughly analagous to what happens in a bankruptcy reorganization. While under the shelter of government ownership the non- banking subsidiaries could be sold or spun-off, and the loan portfolio could be purged.It would take several years. It took more than a decade for the utility holding companies to get straightened out and the bank problem is much more complex.In fact, it is this very complexity that will make nationalization necessary.
“Barbara, I think bankers know someone is going to get left holding the bag, but also know it won’t be them. That’s one or two steps past government thinking. And I’m pretty sure this is the nature of the two beasts.”
This isn’t exactly true. The bankers do, of course, want the government to cover their liabilities, but they also want the government to leave them in control. That’s what all this “free market is in danger!” stuff is and that’s also why we hear the bellowing of gored livestock at the thought that the government as primary client would demand to set the wage for the service the banker provides. The bankers thought, at one point, that the bail-out would mean that Uncle Sugar would just hand them buckets of free cash (or the next best thing – federal guarantees) and step back. But the government is not so inclined. And one big reason for this is that they government already gave the banks money last year and the banks basically sat on it. So they are no longer trusted, nor should they be.
They probably sat on it because it was in their, I mean, their stockholder’s best interest for the bank to conserve capital for itself. But the government acts in the public interest and I think the bankers have shown very clearly that they will sell out the general public to protect their own personal interests, rather as they have been doing all along.
Kathy, knowing that someone else would likely be left holding the bag is what caused them to be reckless. In either case, their idea of reckoning is founded on the idea that it will be at someone else’s expense. That’s not my idea of reckoning, nor, I suspect, is it most other people’s. I have no idea what point you are trying to make.
Banks (some? all?) act like wild heiresses, con men, shell game vendors, etc., but they don’t precisely print money. They aren’t their own underwriters.
“Kathy, knowing that someone else would likely be left holding the bag is what caused them to be reckless. ”
In the case of the banks, I suspect that they weren’t counting on Federal backstopping nearly to the extent that, for example, investors and mgmt at Fannie and Freddie counted on Uncle Sam to make their problems go away.
I attribute most of it to short-term thinking, i.e. do whatever it takes to beat the quarterly goal and make the bonus. Also a single minded focus on their own navels and failure to realize that the risks they were taking on were also being taken on by every single other player in the industry, and that if real estate imploded, it would bring down more than their little department – it would bring down the bank, the industry and the entire economy.
Barbara said: “Kathy, knowing that someone else would likely be left holding the bag is what caused them to be reckless. In either case, their idea of reckoning is founded on the idea that it will be at someone else’s expense.”
Bankers might be smart, but they are not exactly that smart. People in high finance do in the very back of their minds count on ultimate government bail outs because that’s what our government has always done. But I don’t think that they make their short term investment decisions like that. The reality is much more mundane. On a day to day basis, they didn’t really see the risk because everyone else was doing what they wanted to do. It’s a classic case of “this must be safe or a smart guy like Bob wouldn’t be buying these things”. Coupled with this was the game of chicken that all the “smart” investors always play when there is any kind of a bubble. They see the train coming but they just know that they will jump out of the way at the last minute. The human failings that led to all of this are really common, however much these prima donnas demand the big salaries for being super heroes.
Kathy said: “Banks (some? all?) act like wild heiresses, con men, shell game vendors, etc., but they don’t precisely print money. They aren’t their own underwriters.”
Ah, but you are wrong. They have been printing their own money. What do you think all this vanished equity was? Inflated assets sit on the books just like gold and you can actually go down a buy a flat panel with it at Best Buy. At least the government will know how much they printed; it will be there for all to see. One of our problems is that we do not even now know how much the banks printed for themselves.
Another reason why banks must be nationalized is that they are incapable of governing themselves. Consider, for examlpe, the actions of the board of the Bank of America who in September 2008 with only 48 hours of due diligence agreed to buy Merrill Lynch for a price which at the time was thought to be $50 billion. This was done when everyone in the world knew that Merrill was insolvent or worse. Then this same board acceded to Merrill’s demands in December 2008 that its employees be paid $3.5 billion in bonuses including $121 million to the top four employees and one million each to 696 other employees who were the very people whose actions destroyed the company. Then look at the board of PNC who paid a bonus of $3.5 million to the CEO who led the bank to the worst performence in its history. The list is endless. Just to stay alive Citicorp has taken $45billion in TARP funds and $100billion+ in guarantees, all of which was caused by irresponsible corporate governance. It would be hard to imagine that the least competant government bureaucrat could not do better.
Unagidon, you are of course right, but I wasn’t really thinking about the government being left holding the bag, so much as I was thinking about investors who bought securitized mortgages and shareholders who end up losing their investment. One of the reasons that the banks are in such straits is that they did not sell all of the securitized debt that they underwrote. Those that joined the party late are the hardest hit — they began underwriting the worst mortgages just as the market for mortgage securities began drying up. The bank that managed to avoid this problem by having very few retained mortgage securities is J.P. Morgan Chase, and it is doing fine. Likewise, as Michael Lewis observed, were Goldman Sachs or Citigroup still run as partnerships it is very unlikely they would have let their risk management become so ineffective because the partners would look past salary and bonus and worry about losses that could more than offset any of their short term gains.
I guess I’m also,worried about the stability of the bond market, and whether the gov’t will be able to weather its own storms.
Beware of acolytes. As Alan Greenspan, former acolyte of Ayn Rand, endorses nationalization of banks, Vladimir Putin, former acolyte of Marx and Lenin, counsels caution:
“Excessive intervention in economic activity and blind faith in the state’s omnipotence is another possible mistake.
“True, the state’s increased role in times of crisis is a natural reaction to market setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent.
“The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation.
“In the 20th century, the Soviet Union made the state’s role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated.
Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors and shareholders for their decisions, is being eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state.
“And one more point: anti-crisis measures should not escalate into financial populism and a refusal to implement responsible macroeconomic policies. The unjustified swelling of the budgetary deficit and the accumulation of public debts are just as destructive as adventurous stock-jobbing.”
http://online.wsj.com/article/SB123317069332125243.html
The exchanges are quite enlightening. But some historical background is necessary.
Remember Continental Bank which became actually bankrupt with its Real Investment Trusts? The government intervened because the bank was “too big to be allowed to fail”.
A real estate friend told me in 1968 / 69 that the bright young fellows at Chase went through his company’s real estate portfolio to buy. “Gabe” said he “they had a taste for lemons which was not to be believed”. 6 years later he was buying back the properties at 5 cents on the dollar.
Need one mention the S&Ls?
A young banker approached the NYS Superintendent of Banks about a great scheme which was the smart thing to do. She replied “Bankers aren’t supposed to be smart. They are supposed to be safe”.
Then there was the period when U.S. banks were borrowing at 10% from Saudi Arabia and lending at 6% to Latin America. They were shortly technically bankrupt, but were permitted to put the “non-performing” loans on the books as performing assets. The unpaid interest was simply added to amount of the loan.
Then the was the vegetable oil shortage which caught American Express [no oil in the tanks] for several hundred million dollars. The Federal Reserve made the banks finance the shortfall because of the number of tourists in the world who held Amex travellers’ checks.
Is it any wonder that the banks expect and expected to be bailed out, yet again?
What is astonishing is the rigid mindset which permits itself enormous salaries and bonuses and golden parachutes while the plane is falling straight down.
Just a footnote to Unagidon’s observation about underwriting.
A long time ago a popular author with the pseudonym of Adam Smith wrote a book entitled “The Money Game” in which he defined liquid assets like stock certificates, bonds and the like as ‘super money ‘. That is fungible assets that people could easily convert into spendable currency. So, as Unigadon, says, firms self-underwrite to the extent that such assets, created out of thin air. are believed to have marketable value, say, like pet rocks.
Beware of acolytes. As Alan Greenspan, former acolyte of Ayn Rand, endorses nationalization of banks, Vladimir Putin, former acolyte of Marx and Lenin, counsels caution:
“Excessive intervention in economic activity and blind faith in the state’s omnipotence is another possible mistake….”
It seems a little too early for April Fool’s (although some say every day is April Fool’s). Speaking of that, I recall another WSJ piece on that date that came out under Spiro Agnew’s byline lecturing the reader about the need for integrity in government.