This is a belated response to Ann D.s important question about the nationalization of banks. I unsubbed from pen-l over the holidays, and am having trouble resubbing, but hopefully this message will go through, and I will start to receive messages again soon.
I think the government should nationalize any systematically significant bank that is headed for bankruptcy and/or asks the government for a rescue. Once banks have become too big to fail, and it is recognized that that the government will always bail out systematically significant banks in order to avoid a systemic collapse, then it follows as a matter of straightforward logic and economic justice that these banks should be nationalized. Otherwise, the implicit bailout promise is a license to take lots of risks and make lots of money in good times, and then let the taxpayers pay for the losses in the bad times. The only way to avoid this legal robbery of taxpayers is to nationalize the banks, so that we never again have to bailout out the banks in order to save the economy. If taxpayers are going to pay for the losses, then they should also receive the profits. Ironically, the main justification for private profit is that capitalists take risks and could suffer losses. But if the losses are not suffered by the capitalists, but instead by the taxpayers, then this justification for private profit disappears. Nationalized banks would also make the economy more stable in the future. Nationalized banks would take fewer risks during an expansion, in order to avoid debt induced bubbles, that inevitably burst and cause so much hardship. For example, there would be no more housing bubbles; instead, the overall housing policy objective would be to make decent affordable housing available for all. With housing more affordable, mortgages would be more affordable and less risky. But I am advocating not just nationalization by itself, but nationalization accompanied by significant haircuts for the existing bondholders of the bankrupt banks, as in normal bankruptcy proceedings. This is a crucial point which is not often recognized. Nationalization without haircuts is a bailout of the bondholders (especially if it is partial or temporary). Nationalization with haircuts makes the banks solvent again, so they could start lending again, and contribute to an economic recovery. Willem Buiter, an economist at the LSE and frequent commentator in the Financial Times, has suggested a new type of bankruptcy that should be applied to banks. He calls it a regulatory bankruptcy, which would allow a government appointed Administrator to modify the debt and equity structure of banks in danger of bankruptcy in very little time and with very little transaction costs. The existing shareholders would usually be wiped out. Unsecured creditors would take haircuts in reverse order of their seniority, as necessary to make the banks solvent again. Nationalization with haircuts is clearly superior to the current TARP policies, which bailout the bondholders at the expense of taxpayers. Nationalization with haircuts costs taxpayers nothing, and they gain more public control over the banking system in the future. It is ridiculous what the government is doing now giving money to banks one way or the other, and then begging them to please lend this money to businesses and households. Nationalization is clearly the better solution. Instead of giving money to the banks and begging them to lend, the government should nationalize banks in trouble and lend directly to credit-worthy businesses and households. Fred ---------------------------------------------------------------- This message was sent using IMP, the Internet Messaging Program. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
