“Nationalization” (A Weekend Comment Competition)

Writing in the Financial Times on January 27th, 2009, Peter Boone and I expressed our opposition to bank nationalization in no uncertain terms,

If you want to end up with the economy of Pakistan, the politics of Ukraine, and the inflation rate of Zimbabwe, bank nationalization is the way to go.

Most others who recently advocated a managed bankruptcy process – or FDIC-type intervention – for big banks (with or without the injection of new government capital) were careful, at least initially, to avoid using the word nationalization.  And many took pains to explain in detail why their proposals were quite different from nationalization.

But at some point this became a debate in which informed bystanders perceived the sides as being for or against “nationalization” - a semiotic transition that has obviously helped the big bankers, at least in the short term.

This weekend’s comment competition is in two parts.  Who first made “nationalization” the central word for the U.S. bank discussion?  And who was most influential in establishing that the national debate be defined in these terms?

73 responses to ““Nationalization” (A Weekend Comment Competition)

  1. Prof. Johnson:

    May be this question is out of the context of nationalization posting but I heard you in Bloomberg yesterday that economy is showing sign of leveling off. Is this true? For some reason I feel uncomfortable about the coincidence of “better than expected” economic data, rise of stock markets, trading income of banks and raising money through pumped up stock price.

    What is your take on forthcoming economic data next week? Is economy recovering? If that is the case then banking problem is solved? I am confused. The problem existed because of money (leveraged) in the system and more money is pumped, and now problem is solved.

    Your Thoughts?

  2. My proposal: Nouriel Roubini

  3. My perception about the whole situation right now is that the govt has been cautious enough to avert any events that can categorize its actions as nationalization even in the remotest of sense.

    But actually none of this makes any real sense to me… Firstly we have the banks with close ties to the govt…on top of that, there’s this stunt the govt does by ‘negotiating’ the results of stress test for whatever reasons that was done…and of course we also have the big nationalization ticket, which has managed to scare the living daylights out of most people…

    So what was our objective again? And what are we doing? How about some stress test for Fed and Geithner?

  4. Erich Riesenberg

    I would guess your op-ed and others like it is partly to blame. You ridicule the notion of the government taking over banks and selling off the pieces, without mentioning that is standard for the FDIC.

  5. Stopping a Financial Crisis, the Swedish Way
    By CARTER DOUGHERTY
    Published: September 22, 2008

    http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?ref=worldbusiness

  6. Charles R. Williams

    I vote for Roubini. I was astounded that he used the word “nationalization” to describe what he was proposing for the banks.

    I think this website is also guilty of throwing the word “nationalization” around in a sloppy way.

    In truth the Paulson-Geithner-Obama team has already nationalized the big banks – at least their losses and a part of their profits. They are interfering daily in banking operations in a most irresponsible way.

  7. If apophasis counts, I’d say Bernanke or Paulson, since they framed the success of their intervention in terms of how few fingerprints they left on bank operations.

  8. Why is it so hard to admit that the cause of the financial meltdown was the US government takeover by banking special interests? Most of your arguments on this blog make sense, because they are beautifully supported by rational arguments. Sadly, they steer clear of the real causes of this financial mess.

    James Kwak was absolutely right in his May 7 post: “The public relations campaign packaging the bank stress tests is kicking into high gear and our professional information managers are really hitting their stride. They face, of course, a classic spin problem: you need to get the information out there, but you don’t want to be too definitive on the first day or soon after – if you’re easy on the banks, that looks bad; if you’re tough on the banks, that might be dangerous.”

    That may be dangerous.

  9. Roubini/Krugman/Stiglitz were among the first. Those who desired to maintain the status quo in the US financial system, Wall St., Obama, Geithner, Bernanke, many other politicians and the MSM were the ones most responsible for framing the debate as socialism, nationalizing the entire US banking system and asking if the US wants politicians running the entire US banking system.

    The original arguments for taking over failed, insolvent institutions were purposely misconstrued as “socialism” to instill fear in the American public. It worked. We avoided “socialism” and took more of a communism, oliagarch selected winners and losers approach.

  10. I second that!

  11. As someone who only started self-educating about all this in depth last summer, following it mostly through the NYT at first, reading blogs later, my recollection is:

    1. When Fannie and Freddie had to be bailed out there was lots of talk about whether their public/private hybrid model (with implicit “won’t-be-allowed-to-fail”ness) was any good or not.

    2. Then in September the word “nationalization” and the Sweden concept started being touted. This was never advocated as real, banks-as-public-utilities nationalization, but corporatist pseudo-nationalization. I guess I read it first in Krugman and the NYT business columnists.

    3. Then later, in intermittent periods where the idea looked like it might take off, right wingers attacked it, trying to smear it as “socialism”. Their flunkies in the MSM often went along with this, when of course the truth is that we already have corporatism, which can be called socialism or lemon socialism or economic fascism or anything you like, but which is most definitely not “free market capitalism”.

    4. Meanwhile some supporters tried to come up with anodyne terms like “pre-privatization” (I forget who coined that; I came across it through Krugman), but this attempt was stillborn.

    5. And for awhile now, no one has talked about it at all. It seems like those who supported pseudo-nationalization have given up for the time being, accepting that the Bush/Obama bailout attempt is going to run its course, and that’s that.

  12. The way the IMF sees it, Bank Nationalization is the only way to clean up the mess:

    http://www.theatlantic.com/doc/200905/imf-advice/4

    “Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.”

  13. Simon,

    I’m basing my answers on a websearch, which I think would be a fair way to do it. The earliest reference I can find to the word nationalization is a blog post by NY Times’ Floyd Norris on September 16, 2008. I think this is first because it happened the day Paulson bailed out AIG. Prior to this, I don’t think apophasis was possible. I think Paulson and Bernanke subsequently defended themselves against charges of nationalizing AIG de facto, and in doing so, inadvertently defined the debate in these terms.

    Incidentally, I also feel Prof. Roubini has been erroneously credited with being the first to see the credit crisis coming. In fact, an entire book was published on this subject as far back as 2003 – “Financial Reckoning Day – Surviving the Soft Depression of the 21st Century” by William Bonner with Addison Wiggin. I think several people besides Bonner and Wiggin saw it coming as well.

    Regards,

    Tacit Assumption

  14. Correction: Paulson defended himself against charges of nationalizing AIG de facto, not Paulson & Bernanke. So, Paulson defined the debate in these terms.

  15. TO GET LEVERAGE, NATIONALIZE!
    September 30, 2008
    THINK OUT OF THE OLD BOX.
    http://patriceayme.wordpress.com/2008/09/

    There is nothing wrong with nationalization as punishment. When the French republic was reestablished in 1944, it was found that the private car company Renault had shown too much enthusiasm cooperating with the Nazis. So it was nationalized.

    Its competitors Peugeot and Panhard (the world’s oldest car companies) were not nationalized, because they had been well behaved (they kept advanced technology away from the Nazis).

    Many banks in the USA have severely misbehaved. Goldman Sachs keeps on behaving as if it owns the government. If not now, then tomorrow. There is nothing wrong about punishing such banks. There is everything wrong about NOT punishing them.

    Fortunately the Obama administration is finally accepting to take control of banks through common stock acquisition, one of several ways of (partly) nationalizing. It’s a government of the people, not of the plutocracy. It is time to remind this to the plutocracy. And we are talking about a few bank holding companies there, not the 9,000 mostly well behaved smaller banks.

    Patrice Ayme

  16. I’ve been banking for 20 years with a nationalized bank(the french post office)which offers fee-free services as long as your current account balance is positive,gives a decent rate on savings accounts and it’s not subject to market woes by trying to compensate by wild billing.Britain’s government is now stepping back from privatizing it’s postal office/bank.
    A national public utilities bank can coexist in a free trade market.

  17. Anonymous Coward

    This has been one of the great frustrations, hearing everyone refer to “nationalization” when they should be talking about “receiverships”, but it seems that people who are “on your side” are doing this too (e.g., Paul Krugman). It would be nice if there was more concerted discipline with wording/message issues like this.

  18. Since the Atlantic article was by none other than Simon Johnson I am very confused by this post. I did not become a regular reader of Baseline until a month ago or so (The Atlantic article was one of the reasons I began reading your daily posts). In that article as can be seen by David M’s snippet, you yourself use the term nationalization in too imprecise a way. The problem as I see it with the demonization of the term is that nationalization can have various incarnations some of which would be disastrous (our current course, concentrating even more power in the hands of the big 4 + GS and MS) and some of which have a chance at working (receivership) but the sad fact is that every economist I read tosses the term around in such an imprecise way that the lower educated or less informed people only consuming MSM like CNBC, Fox News, or CNN can only be expected to misinterpret. Who started using the term is less relevant than the fact that economists of all strips and pundits continue to allow the discussion to be framed with such a loaded yet inexact and fluid word as nationalization.

  19. I guess I’m with “Anonymous Coward” on this one. Let them declare bankruptcy, go into receivership, and–with an S&L-like plan–sell off the assets to the private sector.

    I’m sure the web search results show the right historic answer, but I think it was Roubini who first called for a Norway-esque nationalization/preprivatization/whatever. In short, he clarified (somewhat) what he thought should happen in a nationalization and re-privatization process.

  20. Isn’t it a little odd to be upset about this – the political consequences of a choice of wording? Is it really true that were “nationalization” not to have emerged as a frequent public name for further government intervention or temporary commandeering of the banks that current resistance would have been significantly diminished?

    The frustration would seem to emerge from a notion that if the word for an extreme policy becomes used to describe a distinct, more moderate, but still aggressive plan, that people will resist the softer policy (that, under a different name, they would otherwise support) because they could no longer differentiate it politically from the undesired extreme.

    Perhaps I am interpreting the argument wrong, but it seems to arise out of this thought process:

    “The government needs to do X to the insolvent financial institutions in order to minimize the duration and damage of this downturn.

    Now if we call X ‘recapitalization’ or ‘receivership’ or ‘conservatorship’, or even ‘FDIC-Xtreme’, etc… most people will go along for the ride. But if the word ‘nationalization’ starts to become the dominant verb in public discourse, it will, like a magic spell, dredge up the angry resistance of the brute masses who will not accept X anymore.

    This will be completely silly and irrational, because such resistance will emerge not due to what is actually happening – the increasing degree of government involvement and expenditure yet short of outright takeover – but only the name ‘nationalization’ itself.”

    Let’s say the above is true. It still seems strange to me to assume that people think “Well, the choice is between ‘nationalization’ (bad, evil, grrrr…) and *nothing* (risky, but maybe also fair?) so I’ll choose nothing.” as opposed to also adding “or, perhaps, something in between” to the range of available options.

  21. comet schmutz on the comet tail

    I tend to agree – Simon Johnson first started pushing “nationalization” on the Bill Moyers show months ago, he then started showing up on NPR subsidiary shows, saying much the same thing.

    Then he stopped saying it around the time of the Terry Gross interview on Fresh Air about a month ago. I listened to the Terry Gross audio twice and couldn’t find a single place wherein he said “nationalize” or “nationalization.”

    Either the term was too confusing, or he changed his mind.

    Simon? Care to explain?

    James, can you explain?

  22. comet schmutz on the comet tail

    excerpt from Feb 13 Bill Moyers Journal

    “BILL MOYERS: So you’re not talking about nationalization, are you?

    SIMON JOHNSON: I’m talking about a scaled up FDIC intervention. I think we need the FDIC to be empowered. And to have the political support necessary to get this job done.”

    I think he flat-out endorsed nationalization on another show at about the same point in the crisis, am looking for it.

    Here’s a link to that transcript, so you can get the quote in context:

    http://www.pbs.org/moyers/journal/02132009/transcript3.html

  23. comet schmutz on the comet tail

    This nationalization-as-bankruptcy Johnson refers to in that article is also pushed by William Buiter at the Financial Times.

  24. TacitAssumption (above) seems to have the timing correct on this. But BondGirl and others are correct that after the AIG debacle, Bernanke’s and Paulson’s repeated self-destructive defense against “nationalization” without offering any alternative word (receivorship???) left them vulnerable. I suppose they were terrified that “receivorship” would have spooked the markets by conjuring fears of bankruptcy – but why not “temporary receivorship”?

    Also, words like “pre-privatization” (introduced later) probably didn’t help the debate. They sounded so much like Orwellian doublespeak that they strengthened the hand of the anti-nationalization faction. The Ayn-Rand crowd happily picked up on this: http://dougreich.blogspot.com/2009/02/conservative-response-to-pre.html

    Just speaking the word “pre-privatization” implied the question, “What is that?”, and the answer, “It’s what the liberal socialists call nationalization so they don’t have to use the word nationalization.”

    “Pre-privatization” was walking into a trap.

    Also, remember that in October 2008, McCain/Palin used their last media nuke – “socialism”, hypersensitizing Obama to such charges. (Remember Joe the Plumber?) This line of attack was fueled by our friends in the Club For Growth.

    http://www.nypost.com/seven/10152008/news/politics/obama_fires_a_robin_hood_warning_shot_133685.htm

    In all fairness to Team Obama, however, the “nationalization” debate was already well defined by January 20th; but Geithner’s later fumbling of the bank plan further limited their options (without risking total implosion).

  25. On a separate note:

    http://www.cnn.com/2009/POLITICS/05/08/johnson.economy/index.html

    There’s a lot more to argue about in this than who started the Nationalization debate!

  26. adios amigos

    Who cares? The decision has already been made, they are NOT nationalizing the banks, or any other corrupt, criminal operations in America. Why are you wasting time debating this issue? The deeply corrupt American government has made a decision: don’t nationalize, and continue to reward corruption. If they decided to nationalize, that would expose exactly how deeply corrupt, and bankrupt these criminal operations (banks) actually are/were. The American government, being a criminal operation themselves, will NOT bite the hand that feeds them. The Americans aren’t even going to prosecute Bush’s team for obvious war crimes, do you think the Americans actually have the ability to do the right thing regarding all the money that has been stolen? ARE YA KIDDING ME?

    AA

  27. Frankly, nationalism seemed to arrive on Wall Street the day that Paulson told a group of congressional leaders that the government needed to step in with nearly a trillion to “save the system.”

    Not clear why the people on Wall Street in need of salvation continue to earn gi-normous salaries, but this is America, after all…..

  28. tippygolden

    As a non economist can an expert tell me why this might not work?

    Why use billions of taxpayers dollars to bail out big banks and / or buy toxic assets?

    Why not use these billions to capitalize a “nationalized” bank (that exemplifies best practices) and then sell off this new bank to repay the financing?

  29. tippygolden

    In my previous post I mean to say: Use the billions to create a new bank (or banks).

    But then the point of baseline scenario is reform the entire banking system. Which is the bigger picture.

  30. Talking to a financial wizard from the banking system, i was tantalized by a theory he had. He thought that the money was intentionally given to AIG to flood dollars into the international financial system to protect the dollar from being debased. This ultimately was more important than helping the American citizen.

    The Federal Reserve intentionally allowed all of this to build and collapse as a chess move against the Euro due to the weakening dollar. He may be way off base but it makes for a fascinating discussion.

  31. Absolutely. I think the administration is going to seize upon any approach that is not nationalization, or at least cannot be construed as nationalization, and that is how we’ve arrived at the “give the banks time to earn their way out” approach.

    The problem is that, while this approach meets the criterion that it is not a form of nationalization, it will be net negative for the country. If it fails, the cost of this crisis to the taxpayer will be considerably larger than if the government were to step in and break up the banks right now. If it succeeds, it will be the shape of things to come – this crisis will repeat itself over and over again, each time getting larger and larger (and our country will be greeting future crises with less debt capacity). The banks will realize that they can set the country off on a credit binge with no consequence to themselves, and all of the jobs that are lost and the other expressions of economic contraction will just be collateral damage to their business model.

    The closer (chronologically speaking) whatever the next manufactured crisis is to this one, the more likely the banks will be able to get away with it, because anything that can be passed off as economic growth will be embraced, whether it is intellectually honest or not.

  32. Blankfiend

    This is a difficult set of questions in that “nationalization” can be, and has been, construed in so many different ways. I will define it here as meaning the government taking recievership of an insolvent financial institution to the detriment of bond holders, share holders, and current management.

    A report on NPR in October of 2008 titled “Is the US ‘Nationalizing’ Banks” http://www.npr.org/templates/story/story.php?storyId=95700786 makes early mention of the word.

    Here is a pertinent excerpt:

    “”Government owning a stake in any private U.S. company is objectionable to most Americans — me included,” said Treasury Secretary Henry Paulson in a prepared statement on Tuesday. “Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”

    Ben Chabot, a senior lecturer in Yale’s department of economics, says the government is “straddling the fence” of nationalization with its latest plan.

    “On the one hand, it’s not nationalization because they didn’t buy common stock with voting rights, so they don’t have a seat at the table,” says Chabot. “[But the] government has all sorts of ways to influence a bank without owning shares in it.” The takeover of Fannie Mae and Freddie Mac is the most recent example of this, he says.”

    Thus, we see none other than Henry Paulson making the case for government support of banks to be void of any ownership stake or voting rights. Roubini picked up on this somewhat later, especially in February of 2009. However, by that time, the Treasury had already broached the issue as being undesirable.

    It is my belief that it was the government itself that brought the most attention to this issue in an attempt to front-run foreseeable calls for its implementation.

  33. tippygolden

    Blankfiend,

    I don’t mean “government taking recievership of an insolvent financial institution”.

    I mean to say: Rather than billions of dollars to bailout banks awash in toxic assets … Why not use billions to create a new bank (or banks) from the ground up.

    This hypothetical new bank: Would not be burdened by toxic assets, would be well-capitalized, and ready to lend based on sound practices.

    There would be no credit freeze to unthaw.

  34. Let the preening failures of the parasitic banks be purged as their failed banks fail. Fail. Fail, fail, fail. Word of the late 00s. You heard it here first. Let’s hope the administration has the presence of mind to keep from being tarred by the failed banks’ brush, of failure.

  35. Blankfiend

    “Fortunately the Obama administration is finally accepting to take control of banks through common stock acquisition, one of several ways of (partly) nationalizing. It’s a government of the people, not of the plutocracy.”

    Patrice, are you serious??

    The Obama administration is as bad as, or worse than, Bush was on this issue. However, they are more cunning and obfuscatory – I will give them that.

    The common stock you refer to will be NON-VOTING stock. It will be foisted on the taxpayers at the option of the banks through the conversion on interest-paying preferred shares.

    If the banks do well, they will repay the government’s preferred shares rapidly in order to stop paying dividends and relieve themselves of compensation restrictions (eg, Goldman Sachs). More probably, if the banks do poorly, they will convert the shares (eg, Citigroup) to common, increasing taxpayer risk and potentially eliminating any forseeable upside.

    “You can fool some of the people all the time, and those are the ones you need to concentrate on.”
    George W. Bush

  36. Blankfiend

    I see two problems with this approach.

    1. What do we do with the insolvency already present in the system? We can’t just ignore it.

    2. The greater problem is that the securitization market which allowed these banks to repackage default risks and sell them to investors is utterly busted. Without the Fed, it just does not exist anymore. This is the system which allowed credit to expand as it allowed banks to meet capital requirements for fractional reserve lending (leveraged lending, where you can lend more than the deposits you have on hand) http://en.wikipedia.org/wiki/Fractional-reserve_banking. It is also the system which allowed default risk to permeate so many areas of the investment community. A new bank would face the same problem securitizing and off-loading loans, and the Fed cannot take on this role, unless you want to see hyperinflation, 40% T-bond yields, and 45% mortgage rates.

    The bottom line is that we have had a credit bubble. IT MUST NOW CONTRACT! Talk of “unthawing credit freezes” is Obama/Geithner-speak for doling out taxpayer money to the banks.

  37. Blankfiend

    Third!

  38. Just so you know. In some of the small places of the world when we speak about nationalizing banks we mean getting them out of being in the hands of foreigners hands so as to be owned by national citizens. Having banks owned by the governments is called “estatizacion”… you’ll sure get the drift.

  39. I dun’ kaere’ but me down on value black

  40. I want to expand on my previous comment.

    I think that the Treasury has usurped the word ‘Nationalization.’ They use it to highlight the socialist connotations of government control of private business. They use it in a self-depricating manner to point out what a mess the government could make of the banks. Two weeks ago, Obama said something to the effect that he has two wars to run, and really does not want to be running the banks.

    But there is a deeper reason for the Administration having commandeered the concept of ‘Nationalization.’ It is much more palatable to the general public to portray government efforts as avoiding “Socialism” or potential bureaucratic incompetence than to admit to an undying devotion to bank stake-holders, both foreign and domestic.

  41. AA,
    I actually fear you are correct. However, as our nation was founded as a democracy, please allow us to fantasize that the nation remains democratic and that our mental masturbation may do some good.

    The day these blogs go silent will be the time to take cover.

  42. TonyForesta

    Forgive me for throwing sand in the face of this debate, but the issue of who or what message-force multiplier first coined, or mentioned “nationalization” is irrelevent. What is relevent however is that the entire financial sector is already defacto NATIONILIZED. Sans the extraordinary wildy obscene largess and BAILOUTS of the government, – the US finance oligarchs would already be carved up into several chunks and a million pieces. The predator class and the finance oligarchs alone and exclusively have already recieved more than one TRILLION tax payerdollars in direct aid, and another astonishing TWELVE TRILLION taxpayer in government guarantee’s. Can anyone fathom these numbers, and if this does not constitute defacto nationalization – what in godzname does? 13 TRILLION in government largess. 13 TRILLION!!!! I say again – 13 TRILLION tax payers. These numbers are both astounding and horrifying. This is the largest most imponderable theft in the history of the world. One select exclusive cabal has abscounded 13 TRILLION dollars from poor and middle class American tax payers.

    It is only the unholy work and perception management of the message-force multipliers in the MSM beholden to the predator class and the finance oligarchs deceptively pretending that this horrorshow bailout scenario is some kind of necessary rescue, that prevents the unwashed mob, from storming the relevent offices en masse and lynching or burning the thieves and swindlers in the finance sector, the socalled regulatory agencies and thier obedient and spaniels in the government. If the ignorant sheeple ever recognize or appreciate the merciless abuse and wanton theivery that the governments of both bush and Obama have perpetutated – the streats will burn and the stores will be pillaged like LA after the Rodney King verdict. Society will collapse and the mob will rule, until it is put down. 13 TRILLION tax payer dollars funnelled to the offshore accounts of the thieves and swindlers on Wall Street who conjured, cloaked, exacerbated, and profited wantonly from the most calamitous economic crisis since the great depression. Whosaidwhatwhen is irrelevent! The government has obdurately and heartlessly heaped the monsterous costs and debts of bailing out and defacto nationalizing the finance oligarchs and predator class on the shoulders of America’s poor and middle class, without providing America poor and middle class any voice, or upside in the nefarious process.

    All the message-force multiplying and all the oligarchs bribe men, cannot put the American dream together again.

    America is a nation whose government is of the predator class, by the predatorclass and for the predatorclass EXCLUSIVELY. The rest of us are as irrelevent as who dared to speak the truth about “nationalization”.

    Guns and ammo are are best defense agains the ruthless wanton merciless plunder, pillaging, and oppression of the predator class. Get locked, cocked and ready to rock, – because the predator class, and sadly their spaniels in the government are bent on destroying America’s poor and middle class. We’re doomed anyway. Better to die fighting than to go like sheep to the slaughter!

  43. TonyForesta

    Riddle me this recondite economics experts? …. Would the American people and global economy not be better served by directing that 13 Trillion – again 13 TRILLION – dollars in government largess directly to America’s poor and middle class taxpayers, – instead of the .0004% of the predatorclass exclusively who conjured, cloaked, exacerbated, and profited wantonly from the most calamitous economic crisis since the great depression. Where is the logic here? What underlying math supports this theft? Why are these people not in jail, or hanging?

    Please explain the logic in, and SOUNDNESS of bailing, excusing, immunizing and then REWARDING – the predatorclass thieves and swindlers on Wall Street who conjured, cloaked, exacerbated, and profited wantonly from the most calamitous economic crisis since the great depression. How does this serve the peoples best interests? How is this legal? How is this sound economics? How is this possible?

  44. tippygolden

    Blankfiend, I’ll need sometime to read your reply and will answer above.

    As for Simon’s questions to start our comment competition. Here is my take.

    The debate over “nationalization” is a red herring.

    It deflects debate from (rich irony indeed) “corporate socialism” in action as Goldman Sachs, AIG and UBS et al. were making off with the cash.

  45. tippygolden

    Corporate socialism as in … socialism for the oligarchs but not for the “lower” classes and the poor.

    Utterly baffling.

  46. TonyForesta

    Words mean nothing! Define those things called “democracy”, “free markets”, “socialism”, “fascism”. All the terms are blurred and slurred, and in the end there is nothing. NOTHIING! Message-force multipliers pimp this or that fiction or myth or rootless concept, – but what is left at the end of the day, – what we all must ultimately confront is a world where there are no laws, there are no truths, there are no morals, there are not standards, there are nor codes, there are no ethics, and there is no goddamn religion. All we have is lies. Lies upon lies, pimping lies, and liars swimming in an ocean of lies. There is no truth, there is no law, there is no justice, there is no hope. Predators dominate and call the dominion and oppression democracy. Tyrants are masked as liberators. Toobigtofail mastersoftheuniverse are framed as untouchable immune Olympians. We have crossed the rubican. We have walked through the looking glass. There is no up, there is no down, there is no right, there is no wrong. There is only winning. There is only triumph and domination. In a world where there are no laws – there are no laws for anyone biiiaaatches!!!

    No one here is without sin!

    May the best man win!!!!

  47. tippygolden

    Yes there is a credit bubble writ large in bad debt.

    You are saying the financial system does not need more capital. The problem is securitizing and off-loading bad loans without accountability. So it goes back to reforming the banking system and discouraging consumer debt.

    Correct?

  48. tippygolden

    “Corporate socialism” — the privatization of profit and the socialization of risks.

    Fear mongering over socialism … by the beneficiaries of corporate socialism. Truly amazing stuff.

  49. “I believe that banking institutions are more dangerous to our liberties than standing armies … If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” (Thomas Jefferson, 1743-1826)

  50. “Let me issue and control a nation’s money supply, and I care not who makes its laws.” (Mayer Amschel Rothschild, Founder of Rothschild Banking Dynasty)

  51. “It is not our own citizens only who are to receive the bounty of our government. More than eight millions of the stock of this bank are held by foreigners… is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country? … Controlling our currency, receiving our public moneys, and holding thousands of our citizens in dependence… would be more formidable and dangerous than a military power of the enemy.” (President Andrew Jackson – July 10, 1832)

  52. “The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers … The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest…” (Abraham Lincoln)

  53. comet schmutz

    Blank,

    What if the very fact that you are on this board instead of organizing within your community is an indication that it is time to take cover?

    Do these small comments mean much toward democracy, or was democracy, as originally conceived, a much more tangible, out-of-doors, pronouncedly non-anonymous activity?

  54. Krugman has been the most outspoken in the natioanal press, along with his urgings for even more government stimulus and little or no help for the auto industry. It’s time to shift emphasis on rebuilding the “real economy”, and especially U.S. manufacturing, where the good paying jobs are.

  55. The debate on nationalization is another illustration of the banks success at shaping the disucssion over the financial crisis as it relates to their role and survivial. It is clear the banks have significant influence over public policy, regulation, and implementation. By positioning the public debate as a narrow discussion on nationalization and by distorting the nature of the debate so it leverages “fear” about permanent government intervention, as in “we don’t want the government running the banks”; “the government can’t run itself, we don’t want them running the banks”; “it’s not in the national interest for the government to run the banks”, they have also won the public debate to avoid any serious reforms while ensuring the status quo.

    The arrogance is nicely demonstrated by Stephen Friedman accepting the role as head of the NY Fed while owning, and then buying more shares of Goldnman’s and apparently not even thinking it could possibly be a conflict of interest. Anyone with his experience must know that having access to confidential information that could impact GS should not also own stock in GS. Not much different then insider trading! Simply unacceptable behaviour but no longer a surprise

  56. tippygolden

    OK …

    Above I proposed a hypothetical new bank. (I will add here: This new bank is accountable for the loans it makes. Eg, regulation will not allow it to off-load securitized toxic assets marketed using bogus ratings!!!)

    Blankfiend suggests this hypothetical new bank would cause hyperinflation. 40% T-bond yields and 45% mortgages.

    I need some help. Why would more capital in the banking system create hyperinflation?

  57. Simon has some explaining to do. I’m with Martin and comet on this. Simon made a cogent argument for nationalization as a method of unwinding our mess, but now he’s apparently changed his mind. I missed the posts explaining this change.

    From my perspective this entire mess caught so many folks by surprise that it’s been a “feel as you go” type of response with more than a few mis-steps and lots of argument.

    Problem primo: No one trusts the derivatives, their contractual relationships, or their pricing. Because these securities were on balance sheets just about everywhere, we found ourselves in a credit collapse, in some critical places at full stop: Commercial paper, as an example.

    The response(s): Zero interest rates as a central bank response; Liquidity supplied as much as possible to intermediary channels that were frozen; Fiscal stimulus as a counter-cyclical response to recession–to name a few. Total commitments above $10 trillion in nominal value. Chances that this figure will be the real number are about zero. The real number will be far, far less.

    As for winding down, or FDIC like responses, Bernanke didn’t see a way to do this without aggravating the overall problem. And he had his hands full just trying to contain the immediate freeze in intermediation worldwide. Given that decision, Bernanke, and the Obama admin, have to live with the “socialism for the rich,” complaint and a Congress that is unlikely to approve more money.

    The results so far. Intermediation is clunking along, but at least at a functional level. Investor fears of total collapse have receeded. Fiscal stimulus is just beginning to kick in. US households are going through the savings “paradox,” and it’s been recessionary, but there you have it and the rates are up strongly. And the public remains POd that the knuckleheads who bought into the entire derivatives fiasco are still at the helm.

    Regulatory capture? Seems to be the case. But that’s a problem for another day because right now we have a severe recession to work through. That is going to take some time and, no doubt, will present us with some breathtaking “air pockets.”

    As for nationalization and that debate, to me it’s a non starter at this stage of the process. I like the idea of a national bank, crisis or no. I think a stodgy, utility national bank would help our economy in good and bad times. Another important policy tool for our nation to invest in itself.

    Which brings up my last point. An underlying cause of this most recent bust was our failure to invest in ourselves. This failure caused a tremendous shortage of strong, capital productive securities. This shortage created the opening for derivatives, which were sold instead. Looked like a duck and quacked like a duck, but turned out to be quackery instead.

    Boom. Suckers.

  58. Because we hate public companies! They are always inefficient and corrupt and vast money losers.

    Except the postal savings systems in Japan. And UK. And… well, most of Europe.

    Or, perhaps, because such an institution would have so many inherent advantages over private competitors that private competitors would torpedo it instantly.

    Also, in the long run, it seems like the US political system has difficulty managing its public and semi-public institutions. Fannie/Sallie/Freddie… Why? Good question.

  59. strike three

    Fourth.

    Hear no evil, see no evil, speak no evil.
    ….do no harm. ha!

  60. When the banks go under. And they will. The people will ask “where did our tax dollars go?”

    They went into private hands.

    No better argument for nationalization. No matter how short it would have been.

  61. tippygolden

    Thanks Beezer.

    In many ways we dealing with the “red herring” of bank nationalization are literally and figuratively working off the same page.

    The upside of a crisis is that it creates dynamic space for transformation.

    I first learned about Baseline when I watched Simon’s interview on the Bill Moyer’s show. My sense is Simon is chaffing to reform the system.

    The issue is citizen activism.

    For example, what would it take to position Simon and his Baseline friends, those who are committed to reforming the financial system — in the public interest — to do this?

    But then the messy world of politics.

  62. tippygolden

    Dare I add … Storm the Bastille of Wall Street and apply (horrors!) the metaphorical guillotine of good governance and regulation?

  63. Bankization trumps Nationalization: Regarding “nationalization,” I can’t say how the use of the term got started and entered into debate. But some that did not want the financial industry (and supporting political/policy/governmental system) to be truly held to account for their bad, unethical, and/or illegal actions used the term extensively. So instead of rule-of-law being applied to the banks/financial industry in some form of “nationalization of banks” (bankruptcy, FDIC receivership, etc.) we now have secured “bankization of the nation” for ourselves. It’s amazing how quickly the government can act to pull nearly $10T in bailouts, stimulus, and guarantees out of nowhere, yet they could not quickly modify the bankruptcy laws to unwind large failed financial companies. Wonder why? Who are the policy makers going to cater to, their paying sponsors (banks/financial industry) or taxpayers? The results speak for themselves. This is a long time coming and it should be no surprise that we now firmly have bankization of the nation. It’s not that the policy makers are criminals in selling the country out, it more that they are too close to the banks/financial industry and they have become captives to the system – it’s like a “Bridge on the River Kwai” syndrome. Is there still time for a “What have I done?” moment and “blow-up” this inherently moral-hazard (or outright immoral) system and get back real capitalism where failed institutions are allowed to fail?

  64. I believe the term ‘nationalisation’ entered to British banking lexicon following the run on Northern Rock in September 2008, a matter the Labour government were opposed too, however, as no private sector takers fancied bailing out this once proud mutual the government after 6 months was forced to take the bank into public ownership.
    Please note a non-emotive use of the word ‘nationalisation’ on my behalf, which is actually, in perhaps a better term ‘ national ownership’. Something persons on this side of the Pond are quite used too.
    With regards the US banking system, Institutional Risk analytics have bandied the word nationalisation and government sponsored entities for more than 12 months, a bit longer than Roubini I believe.
    I believe the major issue for US-based financial institutions is twofold.
    Following the repeal of Glass-Steagal, you had major developments in universal banks and these banks were deposit takers, and thus covered by FDIC insurance.
    The merger of broker-dealers into commercial banks caused numourous issues of oversight, both state and federal, with the regulators, even if they had the will, unable to keep up with the risks involved in complex financial engineering – a matter former employees of the OCC have had the courtesy to acknowledge – the Fed being a different beast though – vis-a-vis – see Spitzer attack on the NY Fed on Slate.
    The juxposition of banking, insurance and securities oversight, lax regulation and Federal government interference caused huge problems. I note the fact that the OCC usurped state regulators in preventing predatory lending, the resultant being the sub-prime mess and the rest we know.
    With all this in mind, the former titan banks of Wall Street, some regulated, others not, established a shadow banking system outside of the remit of all regulatory bodies – Greenspan et al believing this a brilliant idea, also caps on leverage were removed, hence 30, even 40 times leverage on a single dollar.
    Indeed, the Fed and other regulators were obsessed by the threat of a hedge fund going down the pan, rather than a broker-dealer or universal, the end result, a US$12 trillion bailout and guarantee programme – the biggest ever intervention by any government globally.
    Now as I see it, and here’s the second part of the discussion, the collapse of Lehman’s closed down the shadow banking system and no amount of liquidity injections todate has helped unfreeze them, ergo, in order for the payments system to work, the government was forced to intervene in an ad-hoc fashion, and an expensive one at that.
    I think the collapse of the payments system would have had untold economic consequences.
    Now whilst Ron Paul et al are correct in suggesting failure should not be rewarded, and all those institutions that screwed up their risk management should fail, the development of the universal banks meant such a course of action would have proved disastrous for the US economy in general – a matter I like many others dislike.
    To summarise, yes, its appropriate to let the broker-dealers, now calling themselves banks to go bust, the large universal banks though, now that’s a different matter and the Fed and the Treasury instead of making the merry dance with Wall Street, should have nationalised all failing institutions important to maintain the payments system.
    This has not happened and the same persons who caused the mess to begin with are either in the same positions, or in the case of Geithner, rewarded with a Cabinet position.
    Thus, and as someone from across the pond, whilst nationalisation can be invoked to save certain banks from themselves, you should not in this instance have a blanket coverage. Hence the US has the worst of both worlds. Perhaps this is why Prof. Johnson has changed his tune on ‘public ownership’ as a short term expedient.

  65. tippygolden

    Thanks Chris for your erudition.

  66. part of it is that the US political system thinks it can’t learn anything from the rest of the world. there are plenty of successful public/private partnerships (even in banking) in other countries.

  67. Those who doubt what you say should read this “Essential Information” release from the Consumer Education Foundation:

    SOLD OUT: How Wall Street and Washington Betrayed America

    http://www.wallstreetwatch.org/soldoutreport.htm

  68. But, Comet, you’re here too. Do you think perhaps the Internet is thus serving as a sort of organizing tool, or at least as a forum for deciding whether and in what way to organize?

  69. “nationalization” (Krugman) is an example of how easy a fun intellectual generalization that seems clever for a moment….well, it matters what words are used after all, and no, we can’t get away with it. We need to use more precise language, or “say what we mean”.

    By the time the somewhat abashed “temporary nationalization” was being substituted by advocates, that battle had already been lost of course.

    The profound irony of it: letting taxpayers have more ownership in return for their money became “nationalization” instead of “investment”, and so became “socialism” (time for sad laughter). Getting ownership stakes in proportion to capital is “socialism” thanks to the temporary pleasure of the original generalization. Not worth it.

  70. Above all, we need a new monetary system. Dennis Kucinich held forth with Stephen Zarlenga April 23, to propose legislation introducing the American Monetary Act.

    I suggest reading this Act at:

    http://mygodimhit.com/bill.pdf

    P.S. The dollar’s purchasing power is annihilated.

    http://seekingalpha.com/article/136589-dollar-s-purchasing-power-annihilated-the-chart-they-don-t-want-you-to-see?source=article_sb_popular

  71. Amen!

  72. comet schmutz

    Hi Carol!

    I hope so! That’s not why I’m here, of course. I’m here because I’m, well, a little too attached to being online. So my criticism is not just of Blankfiend, but of myself.

    I do worry that we think we’re accomplishing things online, when actually, it’s just entertainment for ourselves.

    I got involved in the bank bailout protests this spring – I’m a first-timer within political activism, and have always been skeptical about protests.

    But as a FIRE sector worker, I feel I have a particular responsibility to help educate other people about what’s going on. (I think the bailout was kind of the wake-up call for me, though I should have been paying attention earlier.)

    It’s been interesting – I’ve gone to protests on the right and left. Right now we’re working on putting together an educational seminar about the bailout.

    There’s enormous support for reform from both sides (I know, because I have actually gone to tea parties, which was professionally nervewracking, but actually kind of enlightening.) The tea party people were really open to learning about technical issues like mark to market accounting and credit default swaps – they’re hungry for information, and seemed flattered that a self-described liberal would think to engage them. Who would have thought from watching the tea party “coverage” on Rachel Maddow and Keith Olbermann?

    I’m also working with another group, ANWF, to help organize an educational seminar – what state do you live in? You’re welcome to come to our seminar, we might even get some “celebrity” (econ/policy world) speakers, but nothing confirmed yet.

    I have to say I’m meeting some interesting people – and as someone who spent too many years on the fusty banking side, I’m learning all sorts of interesting things to admire about people I normally would have ignored. I have to admit, it’s kind of fun, but seriously? I want some real bank reform results out of this.

    I’m sure I’ll be disappointed, but I think if you set the goal for helping to educate your fellow citizens on basic issues, then you can actually meet that goal. I don’t know if we’ll ever get the legislation we need, but we can try…

    Another thing: I think it’s great that the conversation here is so high-level, and I particularly admire Kwak, StatsGuy and BondGirl, but I hope people take what they’re saying and start breaking it down into more digestible pieces for ordinary people. Call me naive, but I believe that’s the key to the legislation we need.

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