The Growing Chorus for Nationalization

[RedEarth]

by CalculatedRisk on 2/14/2009 04:22:00 PM
Bill Moyer's interviews Simon Johnson (ht Nemo)

Former chief economist of the International Monetary Fund (IMF), MIT Sloan School of Management professor and senior fellow at the Peterson Institute for International Economics, Simon Johnson examines President Obama's plan for economic recovery.


And Joe Nocera writes in the NY Times: A Stress Test for the Latest Bailout Plan (ht MrM)


Matthew Richardson and Nouriel Roubini write the WaPo: Nationalize the Banks! We're all Swedes Now

First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.

Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.

The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.

Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.

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 would also be instituted to reduce the chances of costly future crises.

http://www.calculatedriskblog.com/2009/02/growing-chorus-for-nationalization.html

[Taverner]

1. Add me to that choir

[oldnslo]

3. Me and my wife, too....

[Taverner]

5. Nationalize the banks, big pharma, big oil and take Education BACK

...that is from the "charter" schools and For-Profit education departments

Its about time we established some EuroSocialism here!

[jgraz]

8. Mi MI MI MI MiiiiiIiii

Just warming up for my solo

[Taverner]

9. It's obvious that privatization has failed

Time to nationalize what has been privatized, reset - and then, maybe, if we're feeling good about it, we can talk about privatizing.

[Xipe Totec]

2. Screw the banks, nationalize the bonuses! n/t

[gristy]

4. yes, yes, YES!

"The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off."

Why any bank gets a dime before the stockholders are wiped out is beyond me.

[Oceansaway]

6. K&R....n/t

[dkf]

7. What happens to all the credit default swaps?

If there are $62 trillion dollars worth of these bottomless pits I don't want the Federal Govt anywhere near these.

[DCKit]

10. Guess the current owners would have to prove their claim....

and those that were sold fraudulently (more than once) need to be investigated.

I think they don't want U.S. looking at derivatives and swaps, lest we find out the real reason they went bust. "Teh Peoples" might begin clamoring for their money back.

[lostinacause]

11. Among the economists I have personally heard discuss the issue this seems to be the general belief,

seize the assets of any bank with negative net worth and temporary hold them until the appropriate time to sell them. This the general rule for dealing with insolvent banks but for some reason the American government seems to wait until the problem balloons before dealing with it. The irrational fear toward anything socialistic is just ridiculous especially when they are essentially doing the same thing anyway.

[defendandprotect]

12. Of course . . . what we bail out, we own -- we should have control over it all -- !!!