Capitalist Bitch Slap – Nationalizing Banks

Banks have failed in the Free Market.  Both Paulson and Greenspan (an avowed Ayn Rand disciple) have admitted this.  For a “free market” to be a Free Market, the market participants (banks in this case) must act Rationally.  Acting Rationally means looking at the viability of the business in the long term, avoiding actions which will cause the business to die, and finding ways to maximize profits within these bounds.  A number of voices, including Greenspan, are saying nationalizing banks may be necessary.  Nationalization may be the only Rational thing to do at this time.

Point 1:  The banks did this to themselves as participants in a free market.  In a Free Market, you are not supposed to be running around, doing whatever you want without regard to the consequences. You are supposed to act Rationally to keep yourself safe and sound and be willing to accept the consequences.

Point 2:  There are many of us who depend on banks every single day of our lives.  If the banks are crippled, we the people who depend on banks every single day of our lives will be harmed. We are allowed to take actions to protect ourselves from the banks.

Paulson, former chairman of Goldman Sachs, thought that TARP would slap the markets upside the head and back into their senses.  After all, it’s the ultimate humiliation for a Free Market banker to be bitch slapped by a government handout and told to take it and not spend it all in one place and don’t come back here again.  Paulson, King of Capitalism, was shocked that the banks did not get religion after the fall of Bear Stearns, the Lehman crash and burn, and shotgun marriages to preserve liquidity and viability.  Paulson thought these actions would smack the banks back into Rational thinking.

Didn’t work.

Now what? Even Ayn Rand disciple Greenspan who believes in self interest and self reliance and accepting consequences, admits nationalization may be one of the only viable choices left.

Nationalization occurs when government takes ownership of private business.  To date, we have partially nationalized the banking system under TARP.  We the people who depend on banks every single day of our lives gave the banks money, got some stock in the companies, but did not get a place in management..

Point 3:  Nationalization of banks is the action of last resort, taken after other actions have been shown to be ineffective.  It’s painful.  It’s embarrassing because you need to admit failure.

What are the alternatives?  We as a country, have many banks.  We could decide to let some fail.  But problems come when banks fail – a buyer needs to be found for the failed bank, bank runs may occur, lending may get tighter.  

Are there enough buyers for failed banks?  I don’t know – finding a buyer for IndyMac took a while.  Bank runs are nasty – banks don’t hold as much cash as people think they do, the deposit insurance system has its cash limits, and bank runs lead to more problems caused by group think that we are all crashing and burning.

Remember how angry people were when IndyMac went down. What happens to our country  if that happens every week?

Sweden nationalized their banks after a housing bubble caused banks to collapse in the early 1990’s.  The government came in, guaranteed bank deposits and creditors, assumed the bad debt, took stock ownership of the banks, and got rid of the bad assets. The government received the cash flows from the sales of assets.  When the banks were recapitalized and stable, the government sold their shares and got out of the banking business.  The taxpayers were paid for their time and trouble, a sound banking system was maintained, and enough banks were kept alive to keep a competitive marketplace. 

During nationalization, it’s also a good time to clean house to create a new culture which will let the bank be successful in a Free Market.

Point 4:  If the banks had really had their head in the Free Market game, this would have never happened.  They would have managed themselves in a Rational way. 

We the People Who Depend on Banks Every Single Day of Our Lives might have to act in our own Rational self interest to nationalize banks because we have run out of alternatives.

  7 comments for “Capitalist Bitch Slap – Nationalizing Banks

  1. Antony Cooke
    February 23, 2009 at 11:29 am

    It would also have helped if the banks had not been so encouraged – more to the point – bludgeoned by politicians (OK, from both parties!) into giving loans to those who could not afford them. Blame and remedy must be spread amongst all of those who got us into this mess.

  2. Mark Yamada
    February 23, 2009 at 12:20 pm

    Paulson successfully lobbied to eliminate the net reserve requirement for investment banks in 2004 as head of GS. He also negotiated with Cox at the SEC to eliminate the Risk Management Office overseeing the investment banks. This led to Bear Stearn’s demise (3.6% tier 1 capital) Lehman, Merrill and others followed. In Canada, banks have over 9% tier 1 capital (most now are over 10%).

    Just have sensible banking rules and enforce them. Oh yes, make Paulson pay a $700 million fine (his GS compensation for last several years), make him write, by hand, apologies to all those who have had foreclosures or who were shareholders of failed banks, force him to live in Africa and devote his life to the uncompensated service of others.

  3. RHackett
    February 23, 2009 at 12:30 pm

    Hey Anthony. The investments in credit default swaps has had far more impact than loans to those who couldn’t afford them.

    Can you tell us which mortgagees were involved in a financial instrument that demands a degree in math to understand?

    Blaming the CRA is the continued talking point parrotted by the uninformed.

  4. Antony Cooke
    February 23, 2009 at 1:49 pm

    Mark Yamada says: “Just have sensible banking rules and enforce them.”

    I agree, but isn’t this essentially the upshot of all I was alluding to?

    And Rhackett: “Blaming the CRA is the continued talking point parrotted by the uninformed.”

    My, my, aren’t we in a snit! I guess since you have all the answers, you should be in Washington ‘fixing’ everything.

  5. RHackett
    February 23, 2009 at 2:19 pm

    Well Anthony we know one thing by your clever retort.

    You’ve found your place.

  6. February 23, 2009 at 2:59 pm

    No bank nationalizing. > The New “Ali Babas”.

  7. demmother
    February 23, 2009 at 9:54 pm

    That invisible hand we learned about in Econ 101 sure packs a punch.

Comments are closed.