Monday, February 23, 2009

It's not a matter of if...

I picture Larry Summers and Tim Geithner in tears, holding each other in a corner of the White House:

Sen. Dodd clearly opened the door to nationalization in an interview with Bloomberg reported this morning. This comes on the heels of Alan Greenspan opening the door to it. And just moments ago Huffington Post reported an interview with Sen. Schumer in which he appears to do more or less the similar, though with a decent amount of caveats and hedging.

These and other comments and developments are driving the value of the big bank stocks down toward their mathematical limit. Citi and BofA have lost another 20% of their value just today. As the reader pointed out earlier, at a certain point this emerging consensus becomes a fait accompli. And as I noted, the administration has been really silent on this.

Is the silence intentional? Because it seems, unmistakably, to be moving this ball forward.

Here's what Gibbs had to say at the press conference on Friday:
"This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government. That's been our belief for quite some time, and we continue to have that."
Krugman had a great piece on the subject this weekend:

Still, isn’t nationalization un-American? No, it’s as American as apple pie.

Lately the Federal Deposit Insurance Corporation has been seizing banks it deems insolvent at the rate of about two a week. When the F.D.I.C. seizes a bank, it takes over the bank’s bad assets, pays off some of its debt, and resells the cleaned-up institution to private investors. And that’s exactly what advocates of temporary nationalization want to see happen, not just to the small banks the F.D.I.C. has been seizing, but to major banks that are similarly insolvent.

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.

Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.

And once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.”

The Obama administration, says Robert Gibbs, the White House spokesman, believes “that a privately held banking system is the correct way to go.” So do we all. But what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery.
Summers and Geithner may not like this, but seems like they won't have a choice. Having this many people of varying ideological stripes come out supporting (or not opposing) this type of plan is a big step towards forcing their hand.

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