Nationalize Failing Banks?

In the last few days, many Americans have been surprised by the sudden willingness of Republicans, such as "Lindsey Graham, Alan Greenspan, John McCain and a bevy of scholars and publicists on the payroll of the Peter G. Peterson Institute" to endorse bank nationalization, write Thomas Ferguson and Robert Johnson in a new article out on The Nation website, "Nationalize Failing Banks? Think Twice."

Ferguson and Johnson remark that "the contrast with Franklin D. Roosevelt, who began his New Deal by promising to drive the money changers from the temple, is obvious and daunting: Here come money changers and their confidants advising us to buy the temple. (Greenspan now works for a hedge fund that likes to bottom fish.)"

What's up, they ask?

Firstly, "much of the wind in the sails of this new push comes from private equity firms [such as] Blackstone, or their political allies, mostly, though not entirely within the Republican Party. Just like everyone else, private equity firms are now having trouble lining up financing. But taking over firms -- like banks -- is what they do for a living."

They also suggest that "not only private equity firms, but many hedge funds, are exulting over the Obama administration's heady talk of 'public-private partnerships' that would help the government dispose of the bad assets that it would take over from the banks."

Ferguson and Johnson suggest that temporary bank nationalization is still a good idea for dealing with the crisis, because it protects taxpayers and works fast. Rather like single-payer health insurance, "the great advantage of the scheme is its simplicity. It tackles the main problems head on. It gets the toxic assets -- all of them -- off the books of the banks at once. And it minimizes ultimate costs to taxpayers.

"Here nationalization's advantage is decisive: while the banks convalesce, the people of the United States take temporary ownership. That means that when the banks finally become healthy again, some trillions of dollars from now, the public's shareholdings can be sold back to private investors at a profit, just as the Swedes did in the 1990s.

"The difference with Hank Paulson's TARP is night and day. This time the financiers actually get rid of their junk assets, because the government sweeps them all into a 'bad bank' that it controls. And there are no tortuous arguments about how to value the distressed assets, because they are already owned by taxpayers. As Joseph Stiglitz has emphasized, the mare's nest of management and stockholder interests that conflict with the public's interest are swept aside."

But Ferguson and Johnson do see potential problems. They argue that "it would be the height of folly for the public to pay to fix the system, only to sell it back into the hands of a tiny financial oligarchy in a position to keep buying both political parties and control regulators...."

They are available for a limited number of interviews.

THOMAS FERGUSON
ROBERT JOHNSON
Ferguson is professor of political science at the University of Massachusetts, Boston, and the author of Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems. Johnson was formerly a managing director at Soros Funds Management and chief economist of the Senate Banking Committee. Part one of their "Too Big To Bail: The 'Paulson Put,' Presidential Politics, and the Global Financial Meltdown," appears in the next issue of the International Journal of Political Economy.