Catastrophe - Dick Morris [40]
Moreover, the federal government realizes that once it nationalizes one bank, the value of all the other shares is likely to crash, out of fears that their bank might be next.
Even so, one top economist, Nouriel Roubini, who predicted our current crisis years ago, points out that “the debate on bank nationalization is borderline surreal, with the U.S. government having already committed—between guarantees, investment, recapitalization, and liquidity provision—about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).”125
“Thus,” he adds, “the U.S. financial system is de facto nationalized. The only issue is whether banks and financial institutions should be nationalized de jure.”126
Former Federal Reserve chairman Alan Greenspan says, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.”127 (But the current Fed chairman, Ben Bernanke, said on February 25, 2009, that the U.S. government isn’t planning “anything like” a nationalization of banks, which would wipe out the stock-holders.128)
Roubini says he’s not opposed to the idea of nationalization, as long as “you take the banks over, you clean them up, and you sell them in rapid order to the private sector.” If it’s “clear that it’s only temporary,” he could support nationalization. “No one’s in favor,” he says, “of a permanent government takeover of the financial system.”129
Oh, no? Has he met Barack Obama and Barney Frank?
Roubini and others have called for a short-term nationalization he euphemistically calls “temporary receivership,”130 along the lines of what Sweden did in the 1990s, when its banking system got into trouble.
Sweden had its own banking mess in 1992. As the New York Times describes it, “after years of imprudent regulation, short-sighted economic policy, and the end of its property boom, [Sweden’s] banking system was…insolvent.”131
To address the crisis, Sweden acted boldly and quickly. It swooped in and nationalized its banks, forcing them to write down their losses. It spent $18.3 billion, in today’s dollars, to rescue its banks, the equivalent of 4 percent of its GDP. (The $700 billion TARP bailout represents about 5 percent of U.S. GDP.)132
But the case of Sweden is notable because its government was willing to accept big political pain in return for its action. It forced the banks to admit which loans were bad and made them write them off (rather than keep them on their balance sheets, praying that things would start looking up). Then the government took over the properties that were in default, presumably evicting people from their homes and forcing businesses to close if they weren’t paying off their debts.
By seizing the properties, Sweden was able to sell them off and make back a good share of the money it had to put up. Then, when the bank balance sheets were finally cleaned up, Sweden resold the banks to new private owners and made back more of its money.
In the end, the taxpayers of Sweden got more than half their money back. The shareholders lost everything, but their stock values had been close to zero anyway. And today the Swedish banking system is weathering the current financial storm rather well, having had its shakeout seventeen years ago.
By contrast, the government of Japan dithered for years, refusing to make banks write off bad loans and keeping banks in private hands. Many blame Japan’s decade-long recession on the government’s failure to follow the Swedes’ example.
What Roubini and other proponents of nationalization are trying to avoid is creating a host of paralyzed banks that exist in name only, prevented by the toxic assets on their balance sheets from actively assisting the economy through new lending. Right now, he says,