"For that, of course, is what nationalizing failed banks really amounts to. In sharp contrast to the bank rescue 'plan' recently put forward by Treasury Secretary Timothy Geithner, outright nationalization does impose costs on bank shareholders and managements. That is why former Treasury Secretary Henry Paulson and the new Obama administration both shied away from the step."
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.
This has to beat just giving the money away, which is what Paulson did and Treasury Secretary Geithner is really proposing, too.
Temporary nationalization of failing banks thus requires strong safeguards. 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. When it comes time to resell the banks back to private ownership, accordingly, it will be vital to clamp unbreakable legal limits on bank concentration, akin to the old limits on news media concentration in localities. There must be major amendments to existing "change of bank control" statutes, so that not only individual banks, but blocs of shareholders holding positions in several banks, cannot end up controlling more than a small percentage of total bank deposits. We cannot risk a modern financial equivalent of the Standard Oil breakup, where the pieces of the old trust ended up basically in the hands of the same shareholders.
Nor can we tolerate the secrecy so far practiced by TARP and the Federal Reserve about who is buying what. The procedures for disposing of the bad assets must be utterly transparent, reported online, and conducted through public auctions that take to heart the myriad failures of privatization auctions around the world and the sometimes dismal history of the Resolution Trust Corporation.
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