The Obama Administration is trying to avoid large bank failures and nationalizations. Nouriel Roubini says accept the inevitability of the bank failures and take them over temporarily to then re-privatize sound banks.
The man has instant impact on public debate. An idea he floated only last week -- that our "zombie banks" be temporarily nationalized -- aired first on Forbes.com, where he writes a weekly column. It has evolved, in the space of just a few days, from radical solution to almost received wisdom.
Last Sunday on ABC, George Stephanopoulos asked Lindsey Graham, the conservative Republican senator, what he thought about all this talk of bank nationalization. Mr. Graham said that he wouldn't take the idea off the table. And on Wednesday, Alan Greenspan told the Financial Times that "it may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring."
The US Federal Deposit Insurance Corporation is too small to take over Citibank and Bank of America. Their potential losses are too large. The nationalization would need to be done some other way or the FDIC would need a large cash injection.
Roubini says debt losses will keep piling up and will take down more banks.
"Six months from now," he replies, "even firms that today look solvent are going to look insolvent. Most of the major banks -- almost all of them -- are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness.
"Between guarantees, liquidity support, and capitalization, the government has provided between $7 trillion to $9 trillion of help to the financial system. De facto, the government is already controlling a good chunk of the banking system. The question is: Do you want to move to the de jure step."
A trillion here. A trillion there. This is starting to add up to real money. Your living standard is dropping.
The faster we get bad debt off of bank balance sheets the faster the recovery will begin. Nationalization wipes out the shareholders. But if nationalization is inevitable then we are better off doing it sooner rather than later.
Fed chairman Ben Bernanke says we do not have zombie banks. But the markets do not believe him.
On Capitol Hill today, Republican Senator Bob Corker has quizzed Ben Bernanke about the nationalisation speculation.
BOB CORKER: But it seems to me that this has been creating this sort of dead man walking, sort of zombie-like banking scenario, and while I have been not using these words out around, it seems to me that what you have explained is a creeping, a creeping nationalism of our banks.
BEN BERNANKE: I think zombie was not an appropriate description for any of the banks, I think they all have substantial franchise value, they're all lending, they're all active, they have substantial international franchises, so I don't think that's an accurate description.
These banks have franchise value. Sure, they have big customer bases. But that doesn't mean they are solvent. A lot of market participants think Citi and other big banks are already insolvent. The pessimists have been more accurate than the government so far. We can't see what is on their balance sheets. So we can only guess.
|Share |||By Randall Parker at 2009 February 25 12:03 AM Economics Disasters|