Nationalize Banks Now

The discussion topic for today is whether our government should nationalize our insolvent banks, rather than continuing to bail out these same banks with taxpayer money so that the people in control of the banks - those people who made the bad business decisions that caused the insolvency in the first place - may continue to preside over those institutions.  The proposal is to allow the government to take over the banks, rather than bailing them out, and to oversee the  orderly liquidation of the banks, while at the same time maintaining the flow of capital into our economy.  A necessary consequence of the nationalization is that the holdings of the banks investors and stockholders will be wiped out.  Part of the orderly liquidation would require the government to hold onto bank assets for a short time in order to re-privatize them once the core of the current economic crisis passes.  

No bank is too big to fail.  The question is whether we have a system in place to assist in an orderly liquidation of failed institutions.  There can be little doubt that our existing institutions (bankruptcy courts) are ill equiped to handle a systemic failure.  Policy decisions need to be mixed with the liquidation.  The same principles that apply to ordinary liquidations are the same; however, the tactics and rules need to be different.  A take over by the government is not perfect, but it is more pallitable than paying huge bonuses and salaries to the people who let their banks fail.  

Continuing the bail out philosophy helps neither the businesses nor the economy.  No government is big enough to stop business cycles either.  The laws of supply and demand control the economy.  When the banks extend credit to borrowers without regard to whether they can repay their loans, it is those banks, their investors and their stockholders that must suffer, not the taxpayers.  When the borrowers as a whole decide (or circumstances require) that it is time to pay the piper and reduce their debt burden, aggregate demand will slacken.  No government manipulation of the banking system will increase demand.  Providing more liquidity will not improve the credit worthiness of the borrowers.  Buying bad loans at above market prices will not affect demand.  Essentially the government bail out and bad bank proposal is nothing more than encouraging the banks to continue to make bad loans to consumers and businesses that cannot afford to take out any more credit.  

What is left is a realization that Bernanke's and the US Government's efforts to avoid a credit collapse and a shrinking economy are nothing more than an attempt to shift the burden of loss and pain of recession from those who assumed the risk (and profited therefrom) to the taxpayers and the workers.  The saving grace is that our economy is strong and commerce will continue once supply and demand are balanced.  Business cycles need to happen.  If banks collapse and are liquidated, there will be new lenders that arise out of the ashes.  The new lenders will learn from the mistakes of others and lend in a more prudent fashion (for a short while anyway).  Cars will continue to sell, albeit at a lower volume, and new mnaufacturers and new dealers will take over where old ones failed.  If we let our government debase our currency and squander our resources to maintain businesses that could not anticipate business cycles, we encourage poor and non-competitive behavior.

Will there be pain from failure?  Of course.  The question is who is in the best position to bear that pain?  If we spread the pain across society, then any recovery will take years.  That is the legacy of FDR and the Great Depression.  It is the legacy of Japan's lost decade.  Liquidate now and watch a healthy new economic phoenix arise from the ashes.  Perhaps Andrew Mellon was right afterall.