The debate on bank nationalization in the United States is off to an inauspicious start. Most of the arguing so far is framed in terms of: yes/no, or what kind of in-between strategy can be tried and for how long. This misses the point.
In some important and not good ways, we have already nationalized the financial system.
There’s the direct ownership that the government received through TARP and the reupping with Citi, BoA and some others. These stakes are obviously not (yet) voting stock, but the taxpayer certainly has capital at considerable risk.
Then we have the lines of credit provided by the Federal Reserve which, without a doubt, were instrumental to the survival of almost all major banks during the fall – and arguably remain critical today. The taxpayer has further downside risk here.
And, most importantly perhaps, we have the expansion of the Fed’s balance sheet as it seeks to step in to replace the weakening banks and the drying up of credit markets. In effect, the Fed is becoming a commercial bank as well as a central bank.
The government is essentially taking over the role of intermediation – take funds in and lend them out – for the US economy. This is a form of nationalization, and it will lead to all the lobbying and politically directed credits we have seen in other nationalized financial systems; taking away this credit once the economy starts to recover will not be easy. We have state control of finance without, well, much control over banks or anything else – we can limit executive compensation (maybe) but we don’t get to appoint directors (or replace entire boards) and we have no say in who really runs anything. Responsibility without power sounds accurate.
Why have we de facto nationalized? Because the private credit system – particularly large banks – is weakened and not getting any better. Attempts to deal with the problem banks are apparently blocked by the political power of influential bankers.
How then do we really privatize? By exercising leadership: take over insolvent banks and immediately reprivatize them. The new controlling owners can replace the boards of directors (tell me: why haven’t they resigned already?), and these boards can decide who to keep and who to let go from existing management. The taxpayer retains a significant number of shares (or the option to buy common stock) as a way to ensure upside participation – the economy will one day recover, and that will be a very good day for owners of the remaining banks.
Above all, we need to encourage or, most likely, force the large insolvent banks to break up. Their political power needs to be broken, and the only way to do that is to pull apart their economic empires. It doesn’t have to be done immediately, but it needs to be a clearly stated goal and metric for the entire reprivatization process.