Would Nationalize By Any Other Name Not Sound So Scary?

Never have I seen an idea move so quickly from the fringe to the mainstream. While three months ago only a few people were even discussing the possibility of nationalizing some of the failed banks, it is now getting serious coverage. Some Republican lawmakers and publications like the Economist and Newsweek have started to openly talk about the possibility.

The fact that at least a few of the worst banks will be nationalized now seems inevitable. Already some banks have received more TARP money than they are now worth. President Obama has even acknowledged that Sweden's nationalization of their banks in the 90's is so far the best model for how to deal with the problem.

It seems that the greatest obstacle to nationalizing the banks is the term nationalization. For decades, the right has turned both socialism and nationalization into four letter words in American politics. This means that Obama's most important objective in dealing with bank crisis is to invent a new name for nationalization. Below is a list of my favorites. Do not be surprised to see one of these names (or something similar) picked up by the White House in the coming weeks:

Structured Bankruptcy
Managed Bankruptcy
Managed Restructuring
Receivership
FDIC Takeover
Temporary FDIC Directorship
Temporary FDIC Management
FDIC Directed Reorganization
FDIC Restructuring
Reorganization
Managed Reorganization
Forced Reorganization
Managed Liquidation
Directed Management Reorganization

Nationalize to Save Capitalism

We are experiencing an unprecedented man-made world financial disaster. There is a lot of blame to go around. Congress shouldn't have pushed laws to try and make it easier for the poor to buy homes. The government should have stopped China from manipulating its currency and flooding the world with cheap capital. The average American shouldn't have taken out loans they couldn't afford. But the vast bulk of the blame rests with the big banks and investment institutions. Your average American can't understand the complexities of these new mortgages. The banks should. It is up to banks to determine who to invest loans in. It is this important skill which justifies bankers' huge salaries and bonuses, and they failed completely.

When a business fails completely it needs to go bankrupt. If bad businesses aren't allowed to fail, we cease to be a capitalist country and become a corporate welfare state. Unfortunately, because of FDIC insurance and the need for people to access their accounts, we can't allow the big banks to go bankrupt. This leaves us with the only logical option: nationalize the banks, fire all the managers, and wipe out the shareholders. The goal should be to break up and try to sell off the banks as quickly as possible.

The argument against nationalization is that the government would do a bad job of running a bank. This is correct. I don't think the government could do a good job of run the banks, but I know for a fact the current CEOs have done a spectacularly horrible job of running the banks. They managed to turn trillions of dollars in stock into worthless paper.

The only alternative to nationalization has been to create a government "bad bank". The bad bank would buy up all the worthless assets from the banks at an above market value. It would be like bailing out the auto companies by having the government pay for hundreds of cars at a million dollars each. People who support the bad bank idea claim it was successful during the Savings and Loan crash in the 80's. The problem is that now, 25 years later, the same people want the same massive bailout--just larger. I promise you this: If we buy up the bad assets now, it will only be 15 years before they come back wanting an even bigger bailout.