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The N word
No, not that N word, the other N word. Nationalize. As in nationalize a financial institution here and there.
Do you know how Paul Krugman is following the TED spread as an indicator of current financial troubles? I'll be following how many times the N word pops up in Google News. Right now the top mentions all concern other countries, of course including Northern Rock in Great Britain. So far this is the closest I've found to hints of nationalization for the United States; in the blogosphere Nouriel Roubini is saying nationalization is better than bailouts.
The Swedes, of course, nationalized Nordbanken, their #2 bank at the time, in the early 1990s, during their financial crisis. They also nationalized Gotabanken and supplied funds to several other institutions. The belief at the time was that loan liquidation would have been even worse. And since Nordbanken was on life support anyway, and the government had to limit systematic risk by paying off creditors anyway, why not just control the bank directly? The bank was subsequently re-privatized. You'll find more background on the Swedish experience here. Of course in these situations none of the options are pretty. But keep in mind that the Fed (and ultimately, the taxpayer) is already residual claimant on the Bear Stearns deal and then read Mises on the dynamics of interventionism.
There are many things we do not do as well as the Swedes. In any case, if use of the N word remains spotty or non-existent in the U.S., you'll know that things are going OK, at least relative to what might have happened.
Addendum: Brad DeLong has much to add, including some policy recommendations. Arnold Kling doesn't agree.
Posted by Tyler Cowen on March 15, 2008 at 03:10 PM in Economics | Permalink
Comments
Here is something I'm wondering: Could a nationalized bank theoretically out-perform market banks because it could likely get around the huge regulatory environment surrounding finance and banking in the US? I suppose you'd need the "right people in charge", but it doesn't seem as far-fetched as a nationalized computer industry, for example. The products and services offered by most banks already seem very homogeneous, I believe due to heavy regulations.
I guess I could ask the same question about health care.
Posted by: Grant at Mar 15, 2008 3:17:00 PM
If a profit maximizing corporation of some sort isn't willing to buy out Bear Stearns, then it should simply be liquidated. Good riddance.
I don't see why we would want such screw-ups to remain in business as a nationalized entity. The whole point of capitalism is that when you create wealth (and jobs and desired products/services), you get to keep it so that you may create still more wealth ((and jobs and desired products/services). If you destroy wealth instead you shouldn't keep getting money shoved at you to detroy yet again.
Just liquidate the sucker, and if there is money left over pay it as dividends to the shareholders. If there isn't money left, then the creditors lose money. The only role I see for the Fed here is to make sure that any losses to creditors don't lead to a third party meltdown. Taxpayers ought not to be paying a dime in the initial liquidation, either directly via general government funds or via less seignorage transfers from the Fed to the Treasury due to Fed losses.
Resources will thus be redirected to businesses with their heads screwed on right, or more right anyway. That is what makes capitalism work.
This is no social crisis. Just another tricky day (or week or so) for shareholders and creditors of a ridiculously overleveraged company.
Posted by: happyjuggler0 at Mar 15, 2008 3:50:25 PM
Well, if you consider money is just a commodity, why do we need 8,000 banks offering the same commodity at the same rate? But if you want a loan, you better be part of the right political party. Russian finance, anyone?
Posted by: jorod at Mar 15, 2008 3:50:36 PM
Norway nationalized it's banks during their financial crisis in the early 1990s. The banks were subsequently re-privatized. On the Norwegian experience:
http://www.norges-bank.no/Pages/Article____13822.aspx
www.bsi.si/library/includes/datoteka.asp?DatotekaId=939
http://www.norges-bank.no/upload/import/publikasjoner/skriftserie/33/hele_heftet.pdf
Posted by: Amnon Portugaly at Mar 15, 2008 4:15:58 PM
If we nationalize, we must amend the civil service laws to allow the newly nationalized bank to pay for talented people to maintain comfortable lifestyles in Manhattan.
Posted by: Dirk at Mar 15, 2008 4:57:17 PM
It's actually Mises versus Friedman. If we're in a liquidity trap then the Fed is following Friedman's prescription of dropping money out of helicopters, going around the banks (in this case to Bearn Stearns).
I'm uncomfortable with the current tact, but I'll bet on Friedman over nationalization.
Posted by: Gary Leff at Mar 15, 2008 5:05:30 PM
Of course nationalization is better than bailouts. Moral hazard, anyone? I sincerely hope that the current crisis doesn't play out like Sweden 1991 (but it sure as hell looks that way -collapsing housing markets, risk poorly priced, cascading margin calls, banks crumbling). The krona hasn't really recovered since 1991. That is likely to happen to the dollar, too.
Posted by: Dan Karreman at Mar 15, 2008 5:51:23 PM
At the beginning of his talk at Google, Krugman claimed with a straight face to have invented the field of currency crises (if that actually is one). No one called him on it either. How long will it take for him to proclaim paternity of the TED spread?
Posted by: Bill Stepp at Mar 15, 2008 6:07:19 PM
How about doing neither: don't nationalize and don't bail out. Bear Stearns is not a bank. There's no danger, therefore, of a bank run. What we should worry about is a contraction of the money supply and Bernanke already has the tools to prevent that. He should let investors take their losses, making clear he won't bail them out, so we can move on. I say this as someone who lost one $4,000 on one mortgage lender stock in the last 2 weeks.
Posted by: David R. Henderson at Mar 15, 2008 6:15:24 PM
"There's no danger, therefore, of a bank run."
You are wrong and dangerously so. Bear is the counter-party to tens if not hundreds of thousands of over-the-counter (OTC) transactions. They had leverage of 30 to 1, thats the word, before fridays fall. That means their 8B of equity was supporting about 240B of deals. Bear will not be able to make good on all of those transactions. If they don't make good, the other side of those trades won't be able to make good on their promises to other parties. I don't know for sure, but I am guessing that many of these counterparties are probably not much better capitalized than Bear is or was.
If Bear defaults, it would make the "Wile-E-Coyote" moment that Paul Krugman described a few months back into a normal one, where gravity is operative and he falls and shatters every bone in his body.
Bear failing would bring about the end of modern capitalism. They should be nationalized, recapitalized, and then sold.
Posted by: mickslam at Mar 15, 2008 7:35:05 PM
Roubini makes a strong case, I think.
Posted by: Bernard Yomtov at Mar 15, 2008 8:03:42 PM
"End of capitalism as we know it"? What?
Posted by: Jacob Oost at Mar 15, 2008 8:39:30 PM
We aren't sure what the inflation rate is, or the real rating of any bond; we don't know which financial institution is on shaky ground until after they collapse, we can't buy insurance to cover defaults...
How can anyone plan a business deal in this country?
I don't think what happens to Bear Stearns is that important in perspective.
On the bright side: they're running ads here in Florida for mass auctions of foreclosed homes, and the starting bids seem to be about a third of the appraised prices. That should give us some data we can use.
Posted by: Jason at Mar 15, 2008 8:42:55 PM
Ya know, I got nothing against those "helicopter models." I get the need for stylization, you assume the helicopter drop to understand the overall effect of monetary policy, abstracting away from the institutions that actually translate Fed policy into liquidity. Yes, wonderful.
But, let's face it, maybe monetary economists should have spent some time thinking about those messy details about how banks actually turn Fed decisions into liquidity, and what happens if enough banks fail due to solvency reasons, and how you then get liquidity out there in the absence of banks.
My first idea: Let the banks fail, and then get a fleet of helicopters and start dropping that cash.
Posted by: Keith at Mar 15, 2008 8:57:38 PM
Bill Stepp,
Krugman has sometimes exaggerated his role in developing cetain strands of thought. But in the area of currency crises,
his claims are pretty justified. this is the area of economics where Krugman did his earliest and most innovative work.
Posted by: Barkley Rosser at Mar 15, 2008 9:14:28 PM
If you think my comments were overblown, please take a quick look at this article at Naked Capitalism
http://www.nakedcapitalism.com/2008/03/bear-death-watch-update-and-nightmare.html
We are staring the end of the world in the face, and there are people here who are talking about the proper libertarian view of the subject.
Posted by: mickslam at Mar 16, 2008 11:26:23 AM
Barkley,
I didn't say PK didn't make a contribution to this field, or that his work had no value, or that he didn't help develop it. I merely stated the simple fact that he didn't invent it, which would be a much stronger claim.
The word Krugmanesque should enter the lexicon. It would describe some of what politicians, and evidently at least some economists, say.
Posted by: Bill Stepp at Mar 16, 2008 11:51:11 AM
A quick follow up. PK might be able to get away with statements like he made at Google when speaking before an audience of non-economists. But somehow I doubt he would have said it in front of a group of Austrian economists, particularly if they worked in monetary theory and history. If he said such a thing, they'd quickly point out all the European economists who actually lived through real currency crises, and who wrote about their causes and consequences.
Posted by: Bill Stepp at Mar 16, 2008 12:10:57 PM
And if only people who had experienced real gravity back in the 1300s were around when my high school teacher told me about so-called "Newtonian" mechanics.
Posted by: Barbar at Mar 16, 2008 3:33:27 PM
In a way, the bank is already nationalized based on regulations and schedules. The bankers automatically get any federal holiday off. Granted this is based on the people who control it, but they seemingly have the same ideals as the government in reference to holding money and spending it.
In comparison, the individual bank customer uses money and puts it in. The banks have come up with something that makes up for how much a customer may put themselves into a deficit and it is called “plastic.” In the government, the leaders decide to borrow money from other nations as well as “itself.”
The simple nationalization of the banks would not be far different than what they are. But as we are a nation of free trade and business opportunity, the idea would not be heavily supported. The Swedish people were in a rut and putting the government in charge made things better. But just as being a country has its advantages a.k.a. can borrow money and things liquidate slower, the problem was postponed so that the banks had time to fix things. This in turn not only made the individual customer better because they had to better watch their spending, but also gave the banks a chance to catch up in their debt.
The controlled factor basically made the competition within the country of bankers pure in a way that made the fluctuation of interest and deadlines constant and equal for everyone. There was no influence in the market. I feel like America is not presently in such a predicament but if the occasion arises, a temporary change like what the Swedes did would not be a bad idea. Therefore, the costs would be fixed and no longer variable according to changes in the market and spending abilities.
Posted by: AG at Mar 18, 2008 2:23:53 AM
In Germany, Ackermann, CEO of Deutsche Bank (the most famous German bank, I think), asked government to swallow up the financial losses due to the housing bubble, even if the financial institutions are well grounded and could take it by themselves.
Essentially, what this advocate of "marketism" wants is that all the people of Germany have to pay the bill for his company malinfesting... So much for corporations being evil users of free-markets, they are rather frequent users of government to limit their own risks.
Posted by: Max at Mar 19, 2008 4:54:16 AM
We never had these problems while on a bi-metal monetary standard. There was no need for Government intervention. Ridiculous.
Posted by: Chris at Mar 31, 2008 8:52:11 AM
I like cats.
Posted by: Alex H at Jul 28, 2008 7:43:17 AM
