I’ve posted about this on QT3 before and I’m saying it again. If the U.S. government is going to be bailing out its banks with public money, it might as well go ahead and nationalize them. But despite calls to do so and on again, off again speculation, that’s not on the cards. Now, I’m a libertarian, so the idea of nationalizing industries that should rightly be in private hands usually doesn’t sit well by me. In this case, however, it’s a straightforward matter of calling a spade a spade. If the banks in question are insolvent and are being kept in business only through public funds, then they’re already nationalized whether you want to call them that or not. After all, U.S. politicians and the general public certainly feel like they have the final say on how the banks should operate and how they should spend their money, exactly as if they were owned by the U.S. government.
The stated reason for not going the nationalization route, that the economy usually works better when the banks are in private hands, makes no sense here either. This statement is generally true and it is true only because private parties, acting for their own interests, are usually better at judging risks and prospects than government bureaucrats. However, they can do this only if they are free to make decisions as they see fit without having their hands tied by the government. In this case, they’ve had their shot and they spectacularly failed to manage the risks. Their shareholders and creditors, having made poor decisions, should be punished by having their investments wiped out. If other banks don’t have the ability to step up to fill the vaccuum , the U.S. government should go ahead and just do it. If the argument is that the government doesn’t have the human expertise and experience to run the banks, well, there’s plenty of unemployed bankers to pick from.
The current setup is the worst of both worlds. The private banks are kept in business through public funds, which is like rewarding the losers and punishing the winners, in this case the many perfectly healthy smaller banks in the U.S. who were wise enough to stay out of the subprime mess and could stand to gain new business if the big banks went bust. At the same time, the banks are private in name but in reality are obliged to act according to the whims of government officials. Like all industries, banks should be either all private or all public. These public-private hybrids are just asking for trouble by creating moral hazards left and right. My own suspicion is that the U.S. government, knowing the true size of the big banks’ toxic assets, is afraid that they might be big enough to bring down even mighty Uncle Sam if the government were to explicitly take on all of their liabilities. That would truly be a nightmare scenario but obfuscation serves no one interests. The sooner the true extent of the damage is revealed, the sooner we can all start rebuilding.
Moral hazard already exists. If you have a small engineering firm and things go wrong, you don’t get help from the govt: you go bust. But if you manage a huge bank you know the govt will bail you out if things go badly wrong as the impact of bank failure and bank runs could have a devastating impact on the economy. This is a huge irony when you think about it. All this money Obama is pumping in is useless. IMO, the best thing is just to leave things to sort themselves out by themselves. Give it TIME. Eventually, sentiment will change and people will realize how cheap property is in the US and the whole cycle will begin again. The money Obama is wasting now will eventually have to be repaid – by someone.
Heh, I wouldn’t go so far as advocate doing nothing. If I were in charge, I’ll probably agree with a giant-sized stimulus bill concentrating on improving physical infrastructure. The usual argument against government spending is that it crowds out private investment which is usually more efficient and more targeted, and bids up costs for everything. In the current situation, there’s no private investment to crowd out, and the government is as well placed as anyone to take advantage of the lower costs of everything now, in the same way that it’s a pretty good idea for anyone with the cash in hand right now to invest in renovation and other home improvement works because it’s as cheap now as it’s ever going to be.
I do agree with you that the government shouldn’t be selectively bailing out giant firms that are doing particularly badly. Government stimulus spending should, as always, be put on for competitive bidding for any firm interested in the work. If it so happens, that a big ailing firm can submit a competitive bid and this is just it needs to survive, all well and good. If it turns out that a smaller firm that had hitherto wisely avoided over-expanding itself is better placed to do the work, the contract should go to it instead.