Rumbling On About Nationalization

We seem to be stuck in a remarkable twilight zone of mixed emotions, ideologies, and political calculations whenever the word ‘nationalization’ creeps into discussion. It is increasingly difficult to keep all the cross currents and strange alliances orderly. We have an, ostensibly, left of center administration desperately trying to talk down the nationalization alternative, while some of our most ardent conservatives have thrown in their lot backing it.

What is going on?

I can only think that the administration is so in the thrall of market driven thinking that it cannot see the simple efficacy of socializing not just the losses that are making the banks insolvent, but also the gains that will inevitably accrue in a few years in the aftermath of recovery.

Take Geithner’s argument this week. He cautioned against what he decried as ‘hasty’ action because the so-called toxic assets will have a higher price in the future. This is an extremely odd statement. I am not, as you are all aware, a huge fan of free market economics, but there has to be a logic to the current low valuation placed on those assets. Geithner says it’s because no one wants to buy them. Well duh! That’s why they aren’t worth anything Tim. Then he really wanders off the textbook message by arguing that they are ‘worth more than their current price’. Ummm. I was taught that something is ‘worth’ what it will fetch in the market. For Geithner to be correct these toxic assets have to have an intrinsic value that no one can quite discern at the moment. He’s spouting rotten economics. Really rotten. And it’s even quite bad accounting.

What the administration seems to be arguing is that we should fork over lots of money to the shareholders of the banks so that the assets can be written down to today’s, incorrect, level, and then applaud when those self same shareholders gather in the windfall profits that will inevitably arrive once the market gets over its temporary inability to understand what those assets are worth. It’s the ‘wait until the market comes to its senses’ policy.

The problem is that the market won’t come to its senses until the banks are healthy. No one believes that the assets are worth much except for Tim and the banks. Claiming that the market is wrong doesn’t seem like leadership to me. It seems like avoidance. Plus for the Treasury Department to think that the market is failing doesn’t give me a warm feeling about its ability to handle the essential tasks of helping manage those markets.

I have no doubt that the toxic assets weighing down on Citibank and the others will eventually be sold for more than they can today. The point is, though, that until they are off the banks balance sheets the banks can’t afford to lend They will wobble along as ‘zombies’ neither dead nor alive.

The whole point of a bailout is to prevent the zombie bank syndrome from hampering the economy’s recovery. The assets won’t go up in value the way Geithner wants them to until the economy recovers. There will not be a recovery until the banks are healthy. The banks won’t get healthy until the assets are sold off.

Geithner doesn’t seem to notice this elementary circular argument. Perhaps he thinks the economy will recover anyway. Perhaps he hasn’t a clue. Or perhaps the administration just wants the whole problem to go away of its own accord.

That sounds a lot like Bush. I thought we had voted for change.

Meantime here’s a great article by Martin Wolf of the Financial Times explaining why the administration is totally misguided:
FT.com / Columnists / Martin Wolf – To nationalise or not, that is the question

The big point to look for in Wolf’s article is the concentration of assets: the ‘big four’ American banks [Citi; JP Morgan Chase; B of A; and Wells Fargo] have 64% of all banking assets. You fix them, you fix banking. Simple. So nationalize any two. That will get the market’s attention and free up credit flows very quickly – after the initial shock of course. Why wait for Tim’s mystery valuations to turn up?

Nationalize now. Every day is a wasted opportunity to get things back to normal.