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.