Obama on Bank Nationalization

[ozymandius]

Our nation's largest banks are insolvent. If you need help understanding this, look up the word insolvent and that definition adequately describes the state of our mismanaged banks.

From the fine people at Calculated Risk, here is some insight into the clouded discussions at the White House.

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.

Comments from Paul Kedrosky:

(S)aying that Sweden had five banks and the U.S. has thousands, so nationalization can’t happen here, is misleading. It ignores the relative GDPs of the two countries. ...(and) the problem is chiefly in the six largest U.S. banks ...

....
But stop and think about what Obama is saying. We know the correct answer, but we are afraid to do it - because of our "culture" - so we are going to follow the Japanese plan.

We should definitely stress test the banks. My suggestion: announce when this will be complete (within 30 days), make the results public, and preprivatize the insolvent ones.

---

Nouriel Roubini says bank nationalization is the way to go.

So does Paul Krugman through a stress-test analogy.

Joseph Stiglitz too.

And now some words penned by the other President from Illinois: The Duty to Think Anew

Courage, President Obama. Courage to state the obvious is your best recourse yet.

[Lasher]

1. I agree, nationalize them.

Relative scale does not dismiss the Switzerland/Japan comparison.

[anonymous171]

2. I think the threat of Nationalization will terrify these bankers into compliance

[ProfessorGAC]

11. It Won't If The Threat Isn't Serious

So, maybe Obama shouldn't be acting like it is NOT an option. Even if we don't do it, the big shots need to be scared straight.
GAC

[anonymous171]

35. I totally agree. nt

[chill_wind]

12. Heh-

Guys like Jamie Dimon - completely whigging out at mere mention of the word.

"JPMorgan would be fine if we stopped talking about (the) damn nationalisation of banks ... we've got plenty of capital," Jamie Dimon said, at the annual meeting of the World Economic Forum in Davos, Switzerland.

[leveymg]

3. So, we nationalize the banks but call it "stress-testing"?

If that serves the same purpose, fine. That's a big if.

Americans really can't live without our illusions of exceptionalism, can we? Even if it kills us.

[Tigermoose]

5. Agreed. We won't call it "nationalization."

It will be gradual and use terms like stress testing. Politically, the term "nationalization" will not go over with probably a majority of the American public. This has to be a gradual and "pragmatic" take over based on experience rather than ideology.

[ozymandius]

6. Stress-Test

Make them prove they're solvent. If they are not - then nationalize them. The rub is sorting out the liars who use accounting tricks to appear solvent.

[cilla4progress]

4. I agree!

This is one of the bold moves Obama needs to make. The other is to let the Republicans filibuster and look like the obstructionist anti-patriots they are. This nonsense about needing 60 votes unfortunately this is now embedded in the consciousness of the majority of Americans who pay only marginal attention and are less knowledgeable about political processes.

One has to wonder if this is Obama's plan, as you say: "stress test" = nationalize, or some version thereof. Every time I underestimate Obama (just about), he proves me wrong again. This may be a set up on his part. You have to know he's considered nationalization - maybe his plan is to phase the awareness of the need for it, gradually, through these measures?

[TornadoTN]

25. The "Stress Test" is paving the way for this to happen

I really don't see any other way to correct this problem without nationalizing the banking industry, otherwise, we are going to be running around in circles chasing this problem indefinitely.

I'm reading this as a measured effort to get us to that point without setting the media and the GOP blowhards into a frenzy. It's using their own arguments against them while paving the way for a government takeover of some of these banks with significant bad asset allocation.

I would suspect to see the banks scramble to make sure they are solvent and accurately reporting their assets without over/under estimation before they face the prospect of being nationalized. I would wager that many of these banks will improve, as if magically, overnight given this scenario.

[cilla4progress]

29. I hope all the "suspicions" here are right -

that the Obama team has roll out on this planned and analyzed step by step. Based on his Presidential campaign, one would certainly expect so. I mean, if we are seeing it, certainly those folks have? Of course, we have the advantage of a little hindsight...the huge Dow drop yesterday,,,

[KoKo]

7. Thanks Ozy... After Geithner's poor performance yesterday....perhaps

there will be some rethinking by Obama on whether nationalization just might be the answer.

[chill_wind]

8. Dean Baker, too: alternative solution-- "bank rationalization". Avoids the n word

Dean Baker's alternative solution-- "bank rationalization". (Is anyone at Team O listening to any of these guys?)

There is a simple alternative, which can be called “bank rationalization” in order to avoid the “n” word. Under this scenario, the government would take possession of insolvent banks. This is not interference with the market, it is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can’t let them be tied up in bankruptcy proceedings for years.

Dealing with the matter all at once can both allow for a quicker fix to the financial system and also ensure fairer treatment of bank creditors. First, the shareholders of bankrupt institutions must be forced to eat their losses. However, we may not want to honor all the debts of the banks at 100 cents on the dollar, which has been current practice.

While the government has guaranteed most deposits, it has not guaranteed the bonds and commercial paper of the banks, nor their commitments on credit default swaps (CDS) and other derivative instruments. If it takes possession of all the bankrupt banks at once, it can apply a uniform policy. For example, it could honor bonds at 90 cents on the dollar or only pay off full CDS obligations to those who actually own the bond that was being insured against default.

To force banks to own up to insolvency, bank rationalization can apply punitive terms to banks that fail subsequently and allow their creditors to hold bank executives personally liable for their losses. Such rules would lead to more truth telling from our bankers.

In short, bank rationalization is both much fairer and better for the economy than the bad bank plan. If only the people who missed the housing bubble can be forced to recognize this fact.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x8159849

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/time-for-bank-rationalization/



"JPMorgan would be fine if we stopped talking about (the) damn nationalisation of banks ... we've got plenty of capital," Jamie Dimon said, at the annual meeting of the World Economic Forum in Davos, Switzerland.

[dkofos]

9. I'm all for nationalization. In the long run it's the only way to fix the problem.

I would like them to start with the top 10.
Open the books, clean the mess up, Make the too big to fail
small enough to manage. Regulate the shit out of them,
and then go after the next top 10.

[Greyhound]

40. No nation that doesn't control it's own currency can survive.

This has been established for hundreds of years, why on earth do we think it no longer applies?

"Let me issue and control a nation’s money and I care not who writes the laws." - Mayer Amschel Rothschild

[cilla4progress]

10. Watch the Krugman piece on PBS Newshour

this is what he says - it may be up Obama / Geithner's sleeve - this may be "pre-nationalization." That would explain in part Geithner's vagueness yesterday. I mean - I'm all for transparency, but there is so much psychology in this, that one could really blow it if they throw everything out on the table (for example, in negotiation, what one might REALLY accept as one's bottom line).

I wouldn't be at all surprised if "the Obamas" are aiming for nationalization - at least temporarily, in order to clean things out - but are laying it, and the choices / consequences, out on the American people, Congress, etc., at a pace they believe it can be digested and accepted. This is also consistent with Obama's quote above.

You heard it here first! :)

[Beetwasher]

13. Right, First "Stress Test"

Then nationalize. Baby steps so you don't spook everyone too much too soon.

[KittyWampus]

14. You struck on something DUer's often either forget or discount, Economics has a psychological factor

[ozymandius]

15. Huge psychological factor, true.

And not the one that Phil Gramm is talking about. Sorry to sound so obtuse: There is confidence that is derived from the gestalt economic climate. And then there's the economic climate derived from the gestalt psychology of all its participants.

[leveymg]

32. What is the difference between meta-gestalt and aggregate gestalt in economics?

The question is, in and of itself, a bit Hegelian, no doubt. But, interesting.

[ozymandius]

43. That question is above my pay grade.

I'll ask one of my Economics colleagues this week.

[jmg257]

16. "took over the banks, nationalized them, got rid of the bad assets"

How does the govt get rid of the bad assets, and why can't the banks do this themselves?

[leveymg]

18. Monetizing the debt is one approach, securitization is the other

In plain language, that's printing enough money to inflate the currency, which draws down the paper value of the bad debts.

Of course, the cost of a loaf of bread can theoretically rise to a trillion dollars that way.

Another way is to securitize it - role them up into Fannie Mae-style "Government Supported Enterprises" and sell them into international markets. Of course, GSEs have been known to fail, which adds back to the Federal debt. TGaken too far this too can have the same effect of setting off a currency crisis.

[jmg257]

28. Thanks! Appreciated!

[ozymandius]

20. Great question. Here's an answer.

A bank will resist ridding itself of bad assets because this will amount to a write-off. This will damage its market capitalization. Bond holders will also take a hit. The bank, especially the too-big-to-fail type, will devalue itself to the point of vulnerability to a hostile takeover. The one big red flag that keeps popping up is the amount of money we hear is necessary to appropriate to render these banks solvent again. The total sum, now in the trillions of dollars, is greater than the market capitalization of all six big banks combined. So they are sitting on a load of shit, some obviously more than others, but we do not know who exactly and for how much individually.

To continue down the road of paying banks for the garbage they own will cost the government (you and me) more than these assets are worth (which is zero - otherwise the banks would have no problems finding buyers). Plus we will still have the same too-big-to-fail banks intact and operating under the same rules. There is a huge moral hazard in that all by itself.

When the government takes over an institution, as it did many times during the FDR administration, the bad assets are written off and become a taxpayer liability. However, the government cuts the big bank into much smaller pieces that are not too-big-to-fail and (the taxpayer) profits by privatizing them again with new rules in place and vigorous new supervision. This plan works very well when the banks have an upside profit potential.

The additional boon from nationalization is the ability to cancel the derivatives contracts (at last estimated count worth ~ $62 trillion globally) that no one seems to be talking about at this juncture. That apparatus, which Warren Buffett called weapons of financial mass destruction, would be neutralized.

These are some basic ideas and all I have time for now. I'll revisit later today.

[jmg257]

27. Wow - thanks for the GREAT answer! It is appreciated! Cheers!

[ozymandius]

36. You're welcome.

And thanks! I'm glad it makes sense. It was a great opportunity to review my history a bit on FDR's policies.

[leveymg]

31. That's an excellent answer.

Your history and policy instincts are both sound. I wish the same could be said for Tim Geithner and the U.S. Congress. Alas, I think we're going to get another expensive Bad Bailout Bill with a Bad Bank and very little chance of success.

[chill_wind]

17. Obama: Nationalization "Wouldn't Make Sense"

By Zachary Roth - February 10, 2009, 6:57PM

" ...Obama, like Geithner, has always seemed skeptical of nationalization. But his answer to ABC would appear to go further than he yet has in declaring that he'll avoid adopting any version of that approach.

Of course, things might look different once we get done with these "stress tests," and find out how many major banks are truly insolvent. But as of now, the president seems dead set against even short term nationalization."

link:
http://tpmmuckraker.talkingpointsmemo.com/2009/02/obama_nationalization_wouldnt_make_sense.php


I'd like to think he's keeping the door cracked open, despite interpretations.

[TornadoTN]

24. I think that's exactly what he's doing

Nationalization isn't without its risks, but they are trivial in the grand scheme of the meltdown we are seeing now.

I believe what Obama and Geithner are doing now is paving the way for that to become an option once we have a clearer picture of just how much the bad assets are a part of some of these banks. A push towards nationalization, in my opinion, is already happening.

[Cerridwen]

19. With all due respect to President Obama...

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.

Aren't those "different traditions" part and parcel of what led us to this mess?

Isn't our "different culture" part of the very problem?

Hasn't our "strong sense of...private capital fulfilling the core...investment needs of the country" how we got here?

Now, I'm no economist, but I'm pretty sure if you keep doing the same thing over and over and expecting different results, you're going to be disappointed, at the very least.

Perhaps Mr. President, it's time the American people examined our "different traditions," "different culture," and our "strong sense of...private capital fulfilling the core...investment needs of the country" and the attendent values therein and get over ourselves. It ain't workin'.

It might be time to change trains of thought.

----

Hey Ozy! :hi:

You sure do look different over here in GD. I almost didn't recognize ya. :D I'm a somewhat regular lurker over at SMW.

[cilla4progress]

21. Nice discussion here

Substantive, educational, snarkless - thanks!

[amborin]

22. reading all this has convinced me: nationalization is the way to go

these big banks don't want anyone to know the magnitude of their bad assets......

finding some way to attach a market value to their bad assets is the big challenge...and the banks are thwarting the attempts to do so....

but want taxpayers to fork over another $2.7 trillion (the cost of O's bank fix) without even knowing what they're paying for....

[amborin]

23. here's another article that discusses it:

<http://www.nytimes.com/2009/01/26/business/economy/26banks.html?_r=1&scp=10&sq=nationalization%20and%20bank%20and%20problem&st=cse>

[dpbrown]

26. Nationalize the banks, let them buy their way out when they're solvent again...

That's the way we need to do this. The banks failed. There is no sense throwing good money after bad in just giving them handouts.

Nationalize them, run them, and when they are running correctly, then let them repay the money invested and they can go private again.

[Marr]

30. That "cultural difference" only exists in our super wealthy, robber baron class. It's not present in

Sweden because they wisely don't allow such a malignant, parasitic class to develop. Drain those few families-- that tiny percentage of a tiny percentage that controls so much of the country's wealth, and you'll see that "cultural difference" disappear overnight.

[deaniac21]

33. It's what Pelosi thinks that really matters.

[Soylent Brice]

34. nationalize the big 6 then already!

just what we want, a decade old stagnant economy.

STOOPID.

it's time for some bold action.

[Kashka-Kat]

37. Uh ... Mr. Obama? If cultures never changed we'd be trading in goats and figs. Or flint tools?

[depakid]

38. Anyone expecting Obama and his center right government to follow sound advice

is going be disappointed.

In some respects, these folks aren't much different than Republicans.

Hell, if this were the early 80's, they would be Republicans.

[anonymous171]

42. Obama is too pro-labor to be a Republican in any decade. nt

[depakid]

44. Maybe on that issue- but both he and Clinton are Rockafeller Republicans

and most assuredly not from the Democratic wing of the Democratic party.

[Greyhound]

39. "the key to getting credit flowing again".

So we have a situation where there are basically two theories of how to deal with this, and only one is being heard by those that will decide.

[Cleita]

41. So let's nationalize the six largest that we have to bail out. That shouldn't

be so difficult and should help take care of the smaller banks by osmosis. C'mon President Obama. I hate to think that the average guy on the street is smarter than your hot shot economic advisors.

[ozymandius]

45. In case you're curious about the text from "The Duty to Think Anew" -

We can succeed only by concert. It is not “can any of us imagine better?” but, “can we all do better?” The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise — with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall ourselves, and then we shall save our country.

–Abraham Lincoln, Annual Message to Congress, Dec. 1, 1862 in: Abraham Lincoln: Speeches and Writings 1859-1865, pp. 414-15 (Libaray of America ed. 1989)

[chill_wind]

50. Thank you for some perfect context.

eom

[slipslidingaway]

46. K&R n/t

[BlooInBloo]

47. That's why I heart CR - just for that end-to-end knowledge and reasoning...

Quite a welcome change from what one sees know-nothings spouting on forums.

[chill_wind]

48. This is an encouraging thought - no?

"PERAB"

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=132&topic_id=8190604&mesg_id=8190604

[Karmadillo]

49. So, once again, we're not the change we've been wating for.

nt