An Example of Bad Economics
Floyd Norris in today’s New York Times says exactly the wrong thing in response to the banking crisis. Here is his comment: Should We Force Banks to Lend? – Floyd Norris Blog –
Norris is an unapologetic free market economist and so it is easy for him to make wrong headed comments like this. His entire argument is built around the difficulty of attracting private capital into banks as they are now constructed because of their bad assets. He goes on to argue that getting tough on the banks by threatening government take overs will only scare away what private capital there was and thus make the crisis worse. As an example he cites the London banks whose stock prices have all fallen dramatically every time the British government has made rumblings about nationalization.
He’s horribly wrong.
The reason those prices have fallen is the realization amongst current shareholders that their holdings are worthless without government money. The banks already are insolvent. The fact that the shares still trade above zero is simply a reflection of the hope that the government will pump cash in without eliminating the current shareholders.
It is bad policy to bail out incompetent shareholders. But that’s what Norris is advocating. he wants the US to put in money so as to avoid having to take over the banks. He wants taxpayers to get the shareholders off the hook. My counterpoint is that they’ve lost their money already: their holdings are worthless without the government backstop. So make the backstop explicit. Nationalize. Eliminate the incompetence and fix the mess. A cleaned up bank will attract tons of private money in a couple of years. Meanwhile taxpayers won’t have been taken for a ride.
I am guessing but I think the problem Norris has is that he just cannot bring himself to advocate nationalization. It sticks in his craw.
So, instead he advocates letting the current shareholders scam some more cash from the taxpayers.
And that’s just wrong.
Which is why his column is so totally off base.
