Zombie banks, voodoo economics—these are just some of the horror-movie terms being tossed around right now that lend an even spookier air to discussion of the economic crisis. But there’s a scarier word being proposed—scarier, at least, to religious devotees of free-market capitalism. That word is “nationalization.”
A USA Today/Gallup poll published in February found that when Americans were asked if they favored the government temporarily taking over troubled banks in order to stabilize them, 54% favored that solution, but when the question was phrased as “temporarily nationalizing” the banks in danger of failing, 57% opposed that plan and only 37% favored it. Nationalization, in other words, is the spookiest word of all in our current debate. So why is that?
Just what is meant by “nationalization” of the troubled banks depends on who you ask. Economist Felix Salmon of Portfolio explained it as, “a situation where the government controls the bank: the easiest criterion to use, I think, is to ask whether the government can appoint a majority of the board of directors. That’s entirely consistent with the government owning less than 100% of the equity in the bank, of course, which might be considered ‘complete nationalization’.”
A recent Newsweek poll characterized temporary nationalization as “. . .where the government takes over a failing bank, cleans its balance sheets, and then quickly sells it off.” 56% of the poll’s respondents were in favor of this solution. The idea is clearly gaining support, but is still not being discussed in any clear manner in most media outlets, despite government sources and experts from former Federal Reserve Bank chairman Alan Greenspan and Republican South Carolina Senator Lindsey Graham to Nobel Prize-winning left-leaning economists, New York Times columnist Paul Krugman and Columbia University professor Joseph Stiglitz.
Salmon noted that the debate over nationalization has been around for months. “I date it back to the debate over the original TARP, when there were a lot of people saying that if the government was going to inject $350 billion into troubled banks, it should get a concomitant ownership stake in return,” he said.
The TARP, otherwise known as the Troubled Assets Relief Plan, was the original $700 billion bailout, done while the Bush administration was still in charge. It pumped money into the banks, but it obviously didn’t do enough. More money has been injected—the U.S. Government currently has a 36% stake in Citigroup—but the banks are still not lending. Stiglitz noted, in a panel discussion in New York recently, that we keep giving more money to the banks without getting more control, and that the resulting budget deficit will be larger because we have not nationalized the banks. So nationalizing the banks, in a sense, is the proper capitalist response, and this explains why Republicans like Lindsey Graham support it.
“The question becomes, when are you throwing good money after bad? When would it be better to take the bank over, break it up, sell it off, and better manage the bad assets versus just infusing it with capital? That to me is an option, call it what you like, that needs to be put on the table. […] When the stress tests are administered and you can see that this bank is a zombie bank, I think there’s growing political will that we’re not going to keep throwing good money after bad,” Graham said on Meet the Press.
Felix Salmon explained in more detail, “Nationalizing banks can be a socialist idea, if it’s done in the way that, say, Francois Mitterrand did it in 1981. If you’re an ideologist who believes in “the common ownership of the means of production, distribution and exchange,” then you’ll naturally want to nationalize the banks. On the other hand, the likes of Alan Greenspan are hardly socialists, and it’s an equally natural consequence of the idea that capitalism is all about letting businesses fail. If you have a bank which is too big to fail, and the government is forced to step in with public funds in order to keep that bank alive, then it’s invidious and full of moral hazard to let the former owners retain any of the upside. That’s much more capitalistic than socialistic.”
So why, if nationalizing the banks in this way isn’t a particularly socialist way to do things, hasn’t Obama’s economic team already done so? They’ve got bipartisan cover for the idea and if the latest Newsweek poll is to be believed, a majority of the population supports the idea. Plus, Obama’s riding high enough in his own poll numbers that one would assume he’d be trusted if he said that this was the way to go. But Obama and his treasury secretary, Timothy Geithner, repeatedly said that they’re not looking at nationalizing the banks. The question really is, then, do they mean it? Or are they just afraid to say it out loud before doing it? After all, since the government—which is, as Krugman notes, code for us, the taxpayers—already owns 36% of Citigroup, we’re nationalizing bit by bit anyway.
Salmon explains. “Of course language matters, and there’s a good chance that if major banks do end up being nationalized, the government will try its best not to use the word. After all, no one has really used the word ‘nationalization’ to describe what has happened to Frannie and AIG, despite the fact that they have surely been nationalized.”
“Conservatorship” was the word used for what happened to Fannie Mae and Freddie Mac, the mortgage giants taken over by the Bush administration prior to the first bank bailouts. The CEOs of Fannie and Freddie stepped down, and stockholders in the companies lost most of the value of their stock—which is what happens when a company fails. After all, buying stock is placing a bet, not buying a guarantee. Of course, CEOs and stockholders in the banks don’t like the idea that this would happen to them. There’s already been outrage over executive bonuses of bailed-out companies, and in the same Newsweek poll, 62% of Americans think too much money has already been spent to help banks. Americans want to know what any of this does for them.
So what would happen to the average person with money in the bank if the government takes over? Well, the easy answer is nothing. Bank deposits are insured with the FDIC, and the government recently increased that insurance coverage to $250,000 per individual (through December 31, 2009). So either way, the government has to take care of regular folks if the banks die. If the government owns your bank, it’ll work out the same as any other change in ownership. Your ATM machine will, instead of telling you that your bank’s been taken over by Wells Fargo, inform you that the U.S Government’s in charge. And if you don’t bank with one of the behemoths that are in danger of collapse, you don’t have to worry at all. Salmon noted, “most smaller institutions really are fine.”
The fear of the collapse of the banks, then, is not that our money will go away. It’s that the banks are unable to provide credit for the things for which it is needed. If you’ve tried to get a loan or a new credit card in the past few months, you know what this means. Our economy has run on credit for so long–writer Barbara Ehrenreich noted, at a panel discussion hosted by The Nation magazine, that “Easy credit was a substitute for decent wages in America.”
But without credit, and without decent wages—or any wages, as unemployment continues to skyrocket—people cannot buy, and companies continue to lay off workers. And so we have to keep attempting to make the banks functional again. But do we, as Lindsey Graham said, keep throwing good money after bad? Or do we finally expect to get a return on our investments, other than more debt to pass on to our children?
In a capitalist society, when you shell out money, you get something in return. We, the taxpayers, have shelled out a bunch of money to massive banks, only to see them still shambling toward us, rotting flesh dropping off, asking for more. Shouldn’t we, then, get something in return, regardless of whether we call it receivership, conservatorship, pre-privatization, or even nationalization? Is that really scarier than keeping the zombie banks going, not really alive but not really dead?