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TERRY MORAN: There are a lot of economists who look at these banks and they say all that garbage that's in them renders them essentially insolvent. Why not just nationalize the banks?

PRESIDENT OBAMA: Well, you know, it's interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.


Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core -- core investment needs of this country.

And so, what we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and ultimately that's going to be the key to getting credit flowing again.

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man your preaching to the coir here.

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SOMEBODY's got cultivation on the mind.

In all seriousness, what are the downsides to nationalisation of banks outside of the complexity involved?

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fter Tim Geithner's uninspired and uninspiring performance today, Barack Obama stepped up to show him how questions about nationalization should be answered:

TERRY MORAN: There are a lot of economists who look at these banks and they say all that garbage that's in them renders them essentially insolvent. Why not just nationalize the banks?

PRESIDENT OBAMA:Well, you know, it's interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core -- core investment needs of this country.

And so, what we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and ultimately that's going to be the key to getting credit flowing again.

Now I'm on the record as being decidedly pro-nationalization, but this is as clear and well-argued a case for not nationalizing as you could hope to get. First, Obama makes it very clear that he understands full well why nationalization is an attractive idea not just at first blush ("Why not just nationalize the banks?") but at second blush too.

Obama then makes the good point that the banking system in the US is orders of magnitude larger and more complex than the banking system in Sweden was when it was nationalized. He doesn't even need to mention that the Swedish government is good at getting things done in the way that American governments simply aren't. You try orchestrating something like this as seamlessly as the Swedes managed it. If the US government was in charge of "managing and overseeing" everything from trillions of dollars in bank assets to the amount that banks charge for a bounced check, there might well be all manner of unintended consequences, and indeed pro-nationalizers like myself have generally tried to come up with plans which would keep the banks operating at arm's length from their shareholder even after they were nationalized.

Obama also talks about "traditions" and "cultures" -- and he's right, the Swedes are much more amenable, on a gut level, to state-owned banks than Americans are. That kind of thing matters more than many economists will admit. America has always prided itself on being the home of private-sector capitalism, and it doesn't want to signal otherwise.

And so the Obama administration has put together a plan which tries to involve private capital as much as possible -- something which really can't be done if you're nationalizing. It's now incumbent upon Tim Geithner to articulate that plan clearly and in detail -- something he inexplicably failed at today. I used to go to his press conferences when he was last at Treasury, in the late 1990s, and he was always very much on top of his brief then, so it defeats me why he would take no questions today and generally be so vague about what he intends to do.

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Virus_with_Shoes said:

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man your preaching to the coir here.

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SOMEBODY's got cultivation on the mind.

In all seriousness, what are the downsides to nationalisation of banks outside of the complexity involved?

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ScavengerType said:

It erodes the morale principle of the nation and lets the commies win. I'm sure someone else will tell you basically just that.

And FYI I am not just an obsessed mycologist but also a bad speller.

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phi1618 said:

Nationalization is an extreme solution that requires that the banks be clearly insolvent before it could be taken. Citigroup and Bank of America are nearly there, but JP Morgan/Chase and Wells Fargo might make it. However, there is significant doubt, and nationalization of C and BAC today could cause a panic leading to a complete inability for JPM or WFC to access the capital markets, which would itself precipitate their collapse and nationalization.

So, no bed of roses.

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Personally, I would like to see bankers have to keep their own personal assets on the line so that if their bank fails, they lose everything they own, including the shirt on their back.  I'm guessing banks would be a lot less likely to go under if those running them were completely ruined if the bank did fail.

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A suggestion for Balance Sheet Transparency and Disclosure
by CalculatedRisk on 2/10/2009 01:53:00 PM

One of the key elements of the Financial Stability Plan is to build "Financial Stability Trust" by conducting "A Comprehensive Stress Test for Major Banks" and providing investors and the public "Increased Balance Sheet Transparency and Disclosure".

Although lacking in details, this is a very good idea. A few suggestions:


Provide a timeline for conducting the stress tests of all institutions with more than $100 billion in assets (like 30 days).

Disclose the results with multiple scenarios on the Financial Stability website by bank (yes, name each bank and the future projected losses under each scenario).

A template for this disclosure could be the JPM presentation when they acquired WaMu.

Here is the table JPM provided:

Click on chart for larger image in new window.

JPM presented the WaMu losses from three scenarios: a base case (with national prices falling 25% peak to trough), a deeper recession (28% decline), and a severe recession (37% decline).

Although unemployment will probably exceed the JPM severe recession scenario of 8% - the point is investors now know that! We can see that in the severe recession, JPM expected national house prices to decline 37% and 54% in California. This would lead to an estimate $54 billion in additional losses.

Note: the toxic assets are frequently described as difficult to value, but the real problem is forecasting future defaults. This is why providing different scenarios for the stress test makes sense. No one has a crystal ball. For mortgage related assets, defaults correlate well with house price declines - so the JPM method is very useful. For other assets (like automobiles), unemployment is a better measure.

A table like this would allow investors and the public to understand which institutions are insolvent under different scenarios, and then provide a guide for the Capital Assistance Program (aka more capital injections). If a bank is massively insolvent, then the next step would be preprivatization. At least we would all know.

If JPM could put this data together in fairly short order, the other institutions - under the supervision of the government - could provide this data within 30 days. One of the key roles for the government would be to make sure the analysis is consistent between institutions: same scenarios, same defaults per house price declines, same results for similar securities.

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How does that solution prevent the problem from occurring again?

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What happens when congress realizes that these nationalized banks make good "bribes" through bad loan policies to draw low/no income voters?

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Not only do we need to look at a solution to the problem, we also need to figure out how to prevent the problem from happening again.

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Why Obama’s new Tarp will fail to rescue the banks
Has Barack Obama’s presidency already failed?
...
All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.
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Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn.
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(The heart of the matter) is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a “no brainer”.
The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.
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Why then is the administration making what appears to be a blunder? ...It has asked itself... what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress.
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there has to be recapitalisation in one of two ways... government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds.

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the TARP was basically a generous gift that sends the message "if you're big and important and fuck up, the government has your back." This is basically an implicit sort of welfare for the rich - take as many risks as you want, losses go to the taxpayer.

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Seuss said:
One final bit that seems to be needed is people holding banks (and wall street) accountable for their hyperinflated spending habits.  Let the banks/companies that are wasting money on lavish executive benefits fail as people move to more financially responsible companies.  I'm not sure how society comes together to make this happen, but until it does, the executives that are bleeding the companies dry will continue to do so

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