The Administration Dodges on Nationalization
First take a quick look at this news item from Market Watch:
U.S. pledges to provide ‘capital buffer’ for banks
It seems as if the administration is saying everything it possibly can to calm the stock markets down and allay fears of nationalization. The Capital Assistance Program is apparently being put forward as a source of ‘buffer capital’ for banks that fail the stress tests now starting.
The news flowing from Washington is an effort to slow nationalization talk down and thus leave open the door for the banks to search for those elusive private investors who are, understandably, unenthusiastic about dumping good money after bad in places like Citibank. I assume that no one really thinks that private capital is much of an option at the moment, although anyone with hugely deep pockets could make a killing in the banking stock sector if they invested in the right bank. Just not one of the really big banks.
But the government’s gotta say what the government’s gotta say. They can hardly walk around all day saying that nationalization is imminent and that the big banks are insolvent. In the direction of that kind of talk lies the ruin of bank runs. Robert Merton’s notion of a ‘self fulfilling prophecy’ used bank runs as its iconic case study. Thus warned we hardly want the administration to talk loosely.
But does all the talk mean that nationalization is really off limits?
I don’t think so. The logic for government control is too compelling and the political downside of continuing to prop up failed banks and reward their failed shareholders will, I think, eventually surpass that of plunging into nationalization.
Yes I realize that it seems un-American to nationalize Citibank or Bank of America, but sometimes the alternatives just aren’t there. Plus as Paul Krugman pointed out sharply this weekend, nationalization is ‘as American as apple pie’ [Watch the discussion here: Krugman and George Will on ABC News Roundtable ]. The FDIC has taken over banks at the rate of two a week so far this year. They happen to be small community banks, but the idea is the same.
On balance I feel that the administration is simply trying to create the atmosphere in which it can act decisively and take over two or three of our major banks. They are testing the waters with alternatives, and they are letting non-administration politicians play the ‘bad guys’.
In the interim the vagueness and evasion continues. Take this as an example: the ‘buffer capital’ provided under the plan will be in the form of preferred stock convertible into common stock ‘only as needed’.
As needed? What circumstances other than nationalization would such a ‘need’ crop up?
Nope, I couldn’t think of one either.
