Chatter about Bank Nationalization

22 02 2009

California Governor Arnold Schwarzenegger joined a growing minority of Republicans in support of the prospect of more aggressive federal intervention of the nation’s the banking system, an idea that has inspired stern opposition from members of his own party and deep anxiety among Wall Street investors and many taxpayers.

The Austrian born Hollywood actor turned politician, who immigrated to the U.S. in part due to his “hatred of socialism, of the whole socialist system”, denied any  change in his views concerning the merits of a centrally planned economy and simply asserted that there was real difference between the kind of intervention currently debated in U.S. and what actually exists in Europe.

“Well, I — first of all, I think that we have a really good system here in America. You don’t have to talk about nationalization. All it basically says is that if a bank doesn’t have the money to — to give their customers, so if it, you know, defaults in some way,” said Gov. Schwarzenegger in an interview on “This Week with George Stephanopoulos.”

” So the federal government always had that right to take over. So it’s not nationalizing anything. I don’t see it as such. There’s a difference of the way it is in Europe, where the — where the federal government owns some of those banks, whereas here only if there is a problem financially that the federal government comes in and takes over and helps out, ” added the California governor.

The notion of temporary intervention has also found support among GOP free market champions like former Chairman of Federal Reserve Alan Greenspan. “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring,” Greenspan told the Financial Times.

Citing the the proliferation of toxic assests rooted in the mortgage sector, South Carolina Republican Senator Lindsey Graham echoed the former chairman’s recommendation last Sunday. “To me, banking and housing are the root cause of this problem. I’m very much afraid any program to salvage the banks is going to require the government,” said on This Week.  “I would not take off the idea of nationalizing the banks.”

Even though there seems to be some sort of daylight between Gov. Schwarzenegger and some of his Republican brethren over the use of the word “nationalization” in substance they seem to be in agreement about the nature of the intervention, which would entail the federal government temporarily owning a majority of the the stake in at least a select number of banks to provide them enough capital to lend, invest and prevent more economic contraction. Other options include securing or outright buying a considerable amount of toxic assets tied to a dismally underperforming mortgage sector and coursing through the major arteries of our ailing credit system and leading to even greater bank undercapitalization.

Plus some kind of government intervention may be the only way to encourage banks to honestly account for the extent of their insolvency so that investors can make more informed decisions about where to put their money.

To be sure, the notion of the federal government owning any stake in a bank, much less a majority of it, is deservedly controversial among Americans of various political persuasions. White House spokesman Robert Gibbs even took great pains to downplay the idea that the administration has plans to nationalize while being careful enough to not rule it out the possibility altogether. “This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,” Gibbs noted at a recent presser.

The mere increase in chatter about nationalization caused a sharp nose dive in trading on Friday.

But much of it has been done already with through the admittedly unpopular $700 billion Troubled Asset Relief Program, pejoratively referred to as the bailout package.  Billions of dollars has been used to buy up significant minority stakes in Bank of American, JP Morgan and Citigroup to shore up their books. After striking a deal worth an eyepopping $85 billion the federal government now owns 80 percent with American International Group, one of the world’s biggest insures.

None of this talk of nationalization or federal intervention warms the heart of most Republicans. Senator Jon Kyl of Arizona said the prospect of doing so is “out of the question” and Senator Mitch McConnell said he wanted stability restored to the financial industry, but emphasized “I really don’t want the government to take over these businesses and start telling them everything about what they can do.”

But many economists see nationalization as an unavoidable. Economist Nouriel Roubini estimated that another $1.4 trillion will be need to properly capitalize the U.S. banking system and prevent the economy from severely contracting to the point where everything from student loans to car loans to commercial loans will become scarce.  Great Depression scholar and Bush appointee, Chairman of the Federal Reserve Ben Bernanke also agreed that some mix of nationalization may be required to prevent key financial institutions from becoming insolvent, but with an eye toward returning  “them to private hands as quickly as possible.”

(H/T: Charting Stocks)

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22 02 2009
What is nationalization? « rssamerica-News-Business-Politics-Sports-Entertainment

[…] of Bank Nationalization – MashGet MarketWatch: What Bank Nationalization Really Means « RBO Chatter about Bank Nationalization « In the Kut Real Time Economics : Lessons from Sweden’s Bank Nationalization PoliPundit.com » Bank […]

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