03.03.09

Free market nationalization

Posted in Society at 22:48 by RjZ

I’m not sure about this. The very nature of the proposal is disturbing to me, but it has at least one very charming characteristic. We’ll get that in a moment. In the meantime it seems everyone has an idea how to deal with the economic crisis and everyone is pointing the blame one place or another. In a taxi in Charlotte, North Carolina, a Russian immigrant driver blamed the banks for their predatory lending. Just the other day NPR had a news story describing a gentlemen having trouble paying his mortgage. He’s underwater and owes more than his house is worth. Of course it was over $600,000 when he bought it and it still appraises at more than $450,00 so forgive me if I don’t feel too sorry for him. Was he really a victim of my taxi driver’s lenders? Is that the kind of person we’re bailing out?

And what about the banks? What kind of board of directors deludes itself, year after year, while darker and darker clouds gather over their balance sheets? Banks that have become so large that they “cannot be allowed to fail” are now holding the American people, née the world, at ransom, demanding governments pay up or crisis will ensue. And they’re paying!

Dr. Simon Johnson has an idea. In the United States we have a little government run organization that does something all the time that most of us wouldn’t like to to think about. When a bank looks like it might become insolvent the Federal Deposit Insurance Corporation, FDIC, takes them over. They take over the bank, control the assets and, as soon as they can, find a new owner. They are motivated to get the best money for the assets of the bank because they’ll have to pay on those assets if the holders withdraw funds, and their also motivated to get the banks out of their hands because otherwise they’ll have no assets left to fund their federally mandated responsibility of covering debts for insolvent banks. In short what the FDIC does is nationalize the banks.

OK, that was scary. Immediately after uttering “nationalize” many people think of latin American despots or socialist governments. Even those on the far left in the United States rarely have quite so much faith in the government that they want banks to run like the department of motor vehicles. (Which for the record, I think works pretty well here.)

Dr. Johnson’s idea is that briefly nationalizing the banks is not only what the FDIC does all the time, although granted not on this scale, but it’s also the very thing the International Monetary Fund does all the time with smaller economies, and with some success.The charming part, though, is that the first thing that happens to these banks is that the board of directors gets fired. Doesn’t that, at least, seem fair? Instead, first the Bush administration and so far the Obama administration have think we ought to hand money to the very same people who contributed to this mess. I should have studied finance (or bought a super expensive house). Where else would my horrible failure be rewarded by keeping my job?

When did defending capitalism turn into handing money to failed business people? Did it start with Bush? Clinton? the Iacoca bail-out? Perhaps “nationalizing” is actually the only free market thing to do?

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