In one of the many historic excerpts from the forthcoming 100th anniversary issue of The Progressive magazine, Socialist Norman Thomas scoffs at Republican accusations that FDR is a "socialist." No socialist, Thomas explains, would stage a short-term government takeover of the banks, only to return them once they were solvent to the same Wall Street millionaires who broke them in the first place.
The passage struck me, because I had just been listening to an economist friend with liberal, free-market views, who manages a mutual fund prescribe exactly that unsocialist cure for the current banking crisis. The government should take over all of the failing financial institutions, clean them up, and turn them back over to private management after letting the shareholders eat their losses, he suggested. The Obama/Geithner alternative: feeding the shareholders with taxpayer money, is an outrageous waste.
Nationalization is sounding less radical by the day and may, in fact, be right around the corner for a whole bunch of major financial institutions, my friend suggests.
Here is some good reading on the subject:
Yves Smith of Naked Capitalism takes apart the "amazingly disingenuous piece" by Alan Binder in the Sunday New York Times on nationalization. The main point: nationalizing the banks is not, as heavy-breathers like Binder imply, expropriation of private property by the state. It's just the opposite: "Instead of a transfer of wealth from the private sector to the state, we have the state (as in the taxpayer) propping up businesses and keeping management demonstrated to be incompetent, perhaps corrupt (let us not forget that overcompensation in phony good times is tantamount to looting, and liberal accounting appears to be awfully common) in place."
Furthermore, the kind of bank nationalization FDR set up after the catastrophic bank runs that kicked off the Depression is still commonly used today. It's just not something the public is aware of: "When a bank fails (technically, the relevant regulators, often state level, deem it to be insolvent, and the FDIC rides in) the FDIC does 'own' it. The assets and liabilities are in the hands of the FDIC, it determines how to dispose of them. However, its preference is to seize the bank on a Friday and have the deposits and branches in new hands by Monday. The fact of FDIC ownership is thus not apparent to the public."
This is the kind of nationalization Norman Thomas sneered at. But it is still a far cry from what the Obama Administration is doing. Instead of wiping out shareholders, replacing top managers, and leaving the banks on sound financial footing, the current bailout shovels money at failing institutions, without extracting much more than weak promises of good behavior from rapacious CEOs. Smith points to the particularly egregious case of Citigroup, explained by John Kay in the Financial Times:
"Vikram Pandit, Citigroup's chief executive, poses the issue in stark terms. When the US government announced further support last week, he was reported as telling analysts: 'We completely remain in day-to-day charge of the company. We are going to run Citi for shareholders.' But if I were a US taxpayer, I would ask why I had provided $45 billion to a business that was going to be run for shareholders, especially when the current value of outside equity is barely 10 per cent of my own contribution."
Paying out bailout money to shareholders is about the most wasteful use imaginable for public funds.
As progressive economist Dean Baker puts it: "Mr. Geithner wants to use taxpayer dollars to keep bankrupt banks in business. In effect, he wants to tax teachers, fire fighters, and Joe the Plumber to protect the wealth of the banks' shareholders and to pay high salaries to their top executives."
This view is becoming mainstream. Check out Kansas City Fed President Thomas Hoenig's criticism of the bank bailout and prescription for across-the-board nationalization of failing banks.
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Hoenig says, "We have been slow to face up to the fundamental problems in our financial system and reluctant to take decisive action with respect to failing institutions. ... We have been quick to provide liquidity and public capital, but we have not defined a consistent plan and not addressed the basic shortcomings and, in some cases, the insolvent position of these institutions."
His solution: "If institutions -- no matter what their size -- have lost market confidence and can't survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses, and begin the process of restoring them to private ownership."
After the government takes over a bank, restructures it, and replaces the managers, "Shareholders would be forced to bear the full risk of the positions they have taken and suffer the resulting losses."
Take that, Tim Geithner and Citigroup!
The tide is turning against free money for unscrupulous bankers and their investors at the expense of regular folks, at about the same rate the economy is going into the toilet. For emphasis, my friend the economist includes this graph of bear markets, showing the current downturn racing the line representing the 1929 crash to the bottom of the chart.
And, finally, Rick Santelli and his colleagues at CNBC get the hilarious knock on the head they deserve from Jon Stewart. In a classic Daily Show Segment, Stewart sends up the absurdity of Wall Street complaints about a tiny portion of bailout money going to homeowners, and then juxtaposes CNBC analysts' predictions with business press clips a few days later: "Bear Stearns is fine" "You can't compare Lehman Brothers to Bear Stearns," "No need to raise capital at Merrill Lynch." These pearls of wisdom all came moments before the banks in question tanked.
Stewart quips: "If I'd only followed CNBC's advice I'd have $1 million, if only I'd started with $100 million."
He concludes with a series of kiss-ass CNBC interviews with CEOs and billionaire operator Sir Allen Stanford, the Texas financier accused of "massive fraud" by the SEC, who recently tried unsuccessfully to flee the United States, and when asked by CNBC's Carl Quintanilla, "Is it fun being a billionaire?" Stanford chuckles, and Quintanella chuckles along with him. "Yes, it is fun being a billionaire," Stanford replies.
"Fuck you," says John Stewart. "You know, between the two of them, I can't decide which one of those guys I'd rather see in jail."
Maybe nationalization is not such an incendiary notion after all.