Is It Time to Nationalize Insolvent Banks?
George Soros framed it this way:
"The hard choice facing the Obama administration is between partially nationalizing the banks, or leaving them in private hands but nationalizing their toxic assets."
For Nouriel Roubini in his February 10th commentary, the choice is clear — the former, not the latter option that will be a "royal (taxpayer) rip-off" if assets are bought at above market valuations.
He sees losses so large that the US banking system "is effectively insolvent in the aggregate." So are most UK banks and many other continental European ones. He lists four Obama options under consideration:
- "recapitalization together with" some kind of government "bad bank" purchase of toxic assets;
- "recapitalization together with government guarantees — after a first loss by the banks — of the toxic assets;"
- "private purchase of toxic assets with a government guarantee and/or....public capital to set up a public-private bad bank where private investors participate" in buying bad assets; or
- "outright government takeover" through nationalizations or "receivership" to be cleaned up, then sold back to private investors.
The first three are deeply flawed. A bad bank may overpay at higher cost to taxpayers. If it buys at mark-to-market prices, "many banks (may go) bust." Even offering guarantees cause "massive valuation problems (with) very expensive risks for taxpayers." Under a bad bank, "the government has the additional problem of having to manage" these assets, something it has little expertise doing.
Geithner's proposal for removing bad assets is "very cumbersome," problematic, and foggy on details. Its main problem is it may end up being "a royal rip-off of the taxpayer if the guarantee is excessive given the true value of the underlying assets." On the other hand, low valuations will expose bank insolvencies and show that government takeovers are essential.
All proposed plans so far "may be a big fudge that either (don't) work or work only if the government bails out shareholders and unsecured (bank) creditors."
Roubini calls nationalization the best option to let shareholders take the pain, not the public. It also "resolves the too-big-to-fail problem (because it's now) become an even bigger-to-fail" (one) as the approach (of letting) weak banks take over weaker ones" has failed.
Sweden in the 1990s had the right approach. Japan had a lost decade with the wrong one and is still mired in trouble. "The US, UK and other (troubled) economies risk near depression and stag-deflation....if they fail to appropriately tackle this most severe crisis."
Plans so far adopted have failed. Wasting more months on more of the same may turn a "U-shaped recession into an L-shaped near depression" with governments forced to nationalize anyway. Roubini proposes Plan N for "nationalization of insolvent banks" here and in other troubled economies.
In a February 15 Washington Post op-ed, Roubini and Matthew Richardson headlined: "Nationalize the Banks! We're all Swedes Now." The US banking system is so close to the edge that "unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it."
The time for dithering is past. "We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it."
Roubini and Richardson are "free-market economists" and New York University Stern School of Business professors.
Michael Hudson's Way "to Save the Economy from Wall Street"
In his view: "The only real solution to today's debt overhang is a debt writedown," and let debtors (the banks and others) take the pain, not the public. "Until this occurs, debt service will crowd out spending on goods and services and there will be no recovery. Debt deflation will drag the economy down while assets are transferred further into the hands of the wealthiest 10 percent of the population (in the financial sector)" while the rest of us get poorer.
Wall Street wants another way, and that's the problem. It wants costs socialized and profits privatized. It believes "free markets are 'free' of public regulation against predatory lending; 'free' of taxing the wealthy (and) shift(ing) the burden onto labor; 'free' for the financial sector to (plunder) the 'real' economy like parasitic ivy around a tree to extract the surplus." This makes a travesty of freedom, but they get away with it because presidents like Obama let them, and, according to one observer, trillion dollar giveaways are like buses. They'll be another one along shortly.
Paul Krugman on Obama's Stimulus Plan
On February 12th, Krugman's New York Times article headlined: "Failure to Rise."
"Break out the Champagne," he wrote...."Or maybe not. These aren't normal times (so) Obama's victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks." Disappointing? Corrupted and awful more accurately describes it.
As for stimulus, Republicans backed the idea that Bush's tax cuts for the rich deserves more of them while John McCain called aiding troubled households "generational theft."
Obama got what he asked for, but "almost certainly didn't ask for enough." While $800 billion sounds impressive, it doesn't bridge the $2.9 trillion gap between the economy's ability to produce over the next three years and what, in fact, it will, according to the Congressional Budget Office.
It's also too long on tax cuts and not enough for millions of troubled households. Overall, "the Obama administration's response....is all too reminiscent of Japan in the 1990s: (hoping for) a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; (it) supports the banking system, but (is) reluctant to force banks to take their losses."
"....I've got a sick feeling in the pit of my stomach....that America isn't rising to (its) greatest economic challenge in 70 years....they seem alarmingly willing to settle for half (and failed) measures (that expose) the grotesque failure of their doctrine in practice." So far the "verdict" on Obama is "no, we can't."
Today's Global "Financial Coup d'Etat" Legacy
Catherine Austin Fitts was a high-level business and government insider and now is Solari.com's editor. On February 2nd, her Financial Coup d'Etat article discussed a "Washington - Wall Street partnership" that for years:
- through fraud, engineered a housing and debt bubble;
- illegally offshored vast sums of capital globally; in Russia, for example, where millions of people discovered their bank accounts and pension funds were gone— "eradicated by a falling currency or stolen by mobsters who laundered money back into big New York Fed member banks for reinvestment to fuel the debt bubble;"
- turned privatization schemes into "piracy," or what she calls "mov(ing) government assets to private investors at below-market prices and then shift(ing) private liabilities back to government at no cost to the private liability holder."
This was in the 1990s. Eight years under George Bush accelerated these practices and created today's global economic crisis, the result of a "Washington — Wall Street game." People everywhere are "up against the same financial pirates and (economic warfare) model" as those in America and the West.
Year after year, a bankster - politician conspiracy continues the global heist — sucking trillions of capital "out of country after country," including in America from Americans. Fitts posed a question she raised in 2001: once the bubble economy imploded, is "the time coming when we (like emerging economies) would be de-modernized?" More than ever, "this is the question" we must ask, and how that prospect affects us.
