Much ado about nationalization

The word “nationalize” has at least one great use, in the punchline of a hilarious Winston Churchill story.

But in the current media firestorm over bank nationalization, maybe it’s time to abolish the word as harmful to thought.  (David Paul seems to agree.)

I’ve used the term myself and like the idea of the government temporarily seizing control of the big zombie banks, but “nationalization” has been bandied about so loosely that it’s lost its meaning.  Many people described the Bush-Paulson capital injections (via purchases of preferred stock that gave the government small nonvoting stakes in some banks) as nationalization, when they were really just crude subsidies (as Willem Buiter pointed out).  And if it’s nationalization for the government to temporarily take over a failing bank so as to help depositors and creditors,  avoid systemic risk and arrange for the orderly sale of its assets, then we’ve been doing it for over 75 years, ever since the creation of the FDIC.  In fact, by some compelling accounts, Sheila Bair’s FDIC has been the one shining light in this crisis.

Have fears of nationalization been causing the accelerated meltdown of financial stock prices, as so much of the media (not just clowns like CNBC’s Jim Cramer) suggest?  Maybe, but Occam’s Razor suggests that fears of insolvency would have the same result:  bankruptcy and nationalization would both wipe out the shareholders.  (Henry Blodget cynically suggests that the nationalization-talk-is-killing-the-market rumors sound like something Bank of America’s P.R. department could have cooked up.)

Unfortunately, it looks like the Obama Administration, far from standing up to the Jim Cramers of the world or listening to economists as diverse as Alan Greenspan and Nouriel Roubini, is not going to let the FDIC give the big zombies their last rites.  Instead, the word is that the administration plans a Paulsonesque big capital infusion into Citibank, giving it 40% of Citi’s common stock.  (And to pump billions more into several other big banks.)  Well short of a controlling majority, probably on purpose, and very likely not enough to make Citi solvent again.  But it would be enough to whip up partisan cries of socialism.  And a populist backlash against any more bailouts for anyone.  As well as valid criticism of a “Geithner put” to keep the big banks’ share prices from imploding any further.  Political and economic stupidity all in one package!

I can only hope that rumors of Citi’s undeath are greatly exaggerated.  Ditto for reports of bank capitulations by the administration.

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One Response to “Much ado about nationalization”

  1. democommie Says:

    I’m all for them calling it whatever they want to, but I want to see some goddamned teeth in these “oversight” provisions. Thus far it looks like the AG of NY is the only person sufficiently exercised to take a look at the doings of these wunderkinds turned enfants terrible.

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