Dollars & Sense: Time for Permanent Nationalization

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Time for Permanent Nationalization
If the big banks are “too big to fail”' they should be public.

By Fred Moseley


The Treasury Department’s recent bailouts of major U.S. banks will result in a massive transfer of income from taxpayers to those banks’ bondholders.

Under the government’s current bailout plan, the total sum of money transferred from taxpayers to bondholders will probably be at least several hundred billion dollars and could be as much as $1 trillion, which is about $3,300 for each man, woman, and child in the United States. These bondholders took risks and made lots of money during the recent boom, but now taxpayers are being forced to bail them out and pay for their losses.

This trillion-dollar transfer of income from taxpayers to bondholders is an economic injustice that should be stopped immediately, and it can be stopped—if the government fully and permanently nationalizes the banks that are “too big to fail.”

The TARP program (“Troubled Assets Recovery Program”) has gone through several incarnations. It was originally intended to purchase high-risk mortgage-backed securities from banks. But this plan floundered because it is very difficult in the current circumstances to determine the value of these risky assets, and thus the price the government should pay for them. The main policy for the first $350 billion spent so far has been to invest government capital into banks by buying preferred stock (which is the equivalent of a loan), which receives a 5% rate of return (Warren Buffet gets a 10% rate of return when he buys preferred stocks these days) and has no voting rights. Managers of the banks are not being replaced, and there are usually cosmetic limits on executive pay, unlikely to be enforced. So these bank managers, who are largely responsible for the banking crisis, will continue to be rewarded with salaries of millions of dollars per year, paid for in part with taxpayer money. Existing bank stock loses value as the bank issues stock secured by TARP funds. ........(more)

The complete piece is at: http://www.dollarsandsense.org/archives/2009/0309moseley.html