Nouriel Roubini: Nationalizing the Banks Can End The Death Spiral We Are In

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Fri Feb-13-09 03:56 PM
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Nouriel Roubini: Nationalizing the Banks Can End The Death Spiral We Are In

Nationalize the Banks! We're all Swedes Now
By Matthew Richardson and Nouriel Roubini
Washington Post
Sunday, February 15, 2009

Matthew Richardson and Nouriel Roubini, professors at New York University's Stern School of Business, both contributed to the upcoming book "Restoring Financial Stability: How to Repair a Failed System."

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The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is nationalization. As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and allow lending finally to resume. Of course, the economy would still stink, but the death spiral we are in would stop.

The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms also would be instituted to reduce the chances of costly future crises.

Nationalizing banks is not without precedent. In 1992, the Swedish government took over its insolvent banks, cleaned them up and reprivatized them. Obviously, the Swedish banking system was much smaller than the U.S. system. Moreover, some of the current U.S. financial institutions are much larger and more complex, making analysis difficult. And today's global capital markets make gaming the system easier than in 1992. But we believe that, if applied correctly, the Swedish solution will work here.

Basically, we're all Swedes now. We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it.

Please read the entire article at:

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/12/AR2009021201602.html?sid=ST2009021203365&s_pos&s_pos=