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Nationalizing Banks is a Socialist Idea that Only a European Economist would Endorse

By: Brian Darling (Diary)  |  January 25th, 2009 at 12:54 PM  | 

RESIZE: AAA

If President Bush’s actions to create the so called Troubled Assets Relief Program (TARP) was socialism-light, the potential of a wholesale federal takeover of the banking system is socialism plain and simple.  The New York Post is reporting that Banking Analysts see three possible options to deal with the banking situation: 

  1. Create a National Bank to take over the banking system;
  2. Create a government owned to take control of toxic assets of the balance sheets of private banks; or,
  3. Continue the failed Bush TARP program to pump in taxpayer moneys when needed to aid distressed banks.
  4. The Conservative Free Market Option 4 – Stop the federal government from taking over banks and let the private sector work out the problem.

Bailouts have not worked and President Bush’s failed attempt to solve the banking problems cost the taxpayer $350 billion to date.  Options 1-3 are government centered solutions to the problem that will expose the taxpayer to trillions in financial risk.  The Post story cited a stat that some Wall Street firms have estimated that it will take $3 trillion to right the banks.  If the Bush Bailout didn’t work, why would the federal government attempt a bailout on steroids that will further implement a failed strategy of government intervention? 

House Republican Leader John Boehner (R-Ohio) has argued for a free market strategy and the end of the TARP program. 

An exit strategy from the taxpayer-funded Troubled Asset Relief Program (TARP) — an exit strategy aimed at getting the federal government out of the private sector.

Agreed.  Socialism of the banks is simply defined as state ownership and administration of our nations banks.  Any more government control of our banking system destroy America’s private banking system and will not solve the problems facing the financial sector.  If well educated corporate officials of these banks could not solve their own bank’s financial problems, why would we expect that unelected bureaucrats at the Department of Treasury will magically solve the problems of all of these distressed banks.  Nationalizing banks is a socialist idea that conservatives should fight.

COMMENTS

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  • davey

    It’s just discussion at this point. After ten years of deregulation to get us into this mess, it’s going to take something big to get us out. Give the man a chance, will you?

    • Jaded

      WE called it Socialism and now we get the ultimate Socialist and a Republican opened the door for more…..so get your facts straight before you go spouting bs!

      BTW it was over regulation that KILLED the auto industry….do your homework child!

    • http://impudent.blognation.us/blog kyle8

      we had a huge increase in regulation of the financial markets after the passage of Sarbanes-Oxley, as well as the push by congress to give loans to unqualified minorities, and the forced adoption of mark to market accounting.

      Stop repeating stupid democrat talking points and learn something before you post here.

      • zuiko
    • http://www.RedState.com/ETCartman Kenny Solomon

      Davey:

      Now that I’ve corked you off big-time and before you go off on me, here’s my reasoning:

      Policy and action matters in freedom, liberty and individual rights.

      I hope you understand this, Davey. Mainly because I do not wish to, nor will I engage in any sort of “mine is bigger” contest with you or anyone else who simply refuses to see what’s right in front of them without questioning anything.

      President Obama has his own views of what he thinks is right for America and he was elected on that basis. Fine. Dandy. That’s the way the cookie bounces (or something like that).

      Congratulations to our 44th President (I mean that sincerely) because it’s one of the hardest jobs in the world to get and possibly one of the easiest to lose.

      Thing is, his policies do not work (proven in many countries time and time again, including this country).

      I also wish you to understand this as well….. Any changes to the laws restricting freedom, liberty and rights will apply to you and everyone else who voted for President Obama and who subsequently accept his appointees in place.

      Did you know Attorney General Designate Eric Holder thinks The 6th Amendment is not necessary ? That’s a real eye-opener for me. He sincerely believes that people don’t need representation if accused of a crime, nor that they are entitled to a fair and speedy trial. That should scare the life out of every single America citizen who understands the rule of law. I’m not even going to go into his views on The 2nd Amendment, because this is not the place.

      As for President G.W. Bush, he lost me and most of us at the bakery a long time ago, when he started agreeing to give away the store. God Bless the man for helping to keep us safe, but that’s not nearly the whole of the job for any POTUS.

      I wrote something on another diary the other day and I’ll run up the last lines of it here……

      President Obama: With all due respect Sir, you need to remember that the very freedoms you threaten to dissolve are what got you to this point.

      Mr. President, it is becoming quite apparent that this is the first time in your life you have had any real responsibility and about two-tenths of one micron of that reality is starting to hit you right between the eyes. I pray that you don?t fall on your face, because all of our lives depend on your lack of ability or willingness to see beyond some bizarre vision of a Utopian existence.

      Cheers !

      • mbecker908

        A stray sockpuppet might, but HE won’t be.

      • olsmithie

        Bush’s plan will take some time to work, (months, years?) no one really knows how long. (if it does)

        Why aren’t the bobbleheads chanting “Give Bush’s plan a chance” to work!”

        I see two drivers in the Demoncrat Pork spending bill:

        1) Socialists are socialists and will be themselves, come H or high water. A dog has to sniff, a Dem has to spend. They could not control themselves long enough to give the appearance of an orderly transition.

        or

        2) The Demoncrats are afraid that given time, Bush’s plan will cause the economy to stabilize, It is essential they get their fingerprints on the economy at the earliest point just in case the Bush solution works.
        The flip side of that is the Devious spending package may sabotage any benefit the Bush plan provides leaving the economy in a mess.

        A economy falling apart even worse, sets the stage for Barack Roosevelt to ride in like a knight on a white horse to save the day by instituting his Socialist initiatives on desperate people, educated by the LiBMedia to think Communism actually works.

        And while it may be debatable if temporarily holding preferred shares is “Nationalizing” banks, true nationalizing of banks or health-care or the automobile industry is no different from Hugo Chavez’s actions, which many here reviled at the time.

        Now that I see it in print it is actually a little scary.

        Regards

    • 6eorge Jetson

      takes us to the aftermath of the Long-Term Capital debacle.

      Yep, the Democratic administration sure performed admirably in foreseeing and preventing that one.

      • http://www.RedState.com/ETCartman Kenny Solomon

        The first three seasons are out now and the fourth is coming in the Summer.

        Also got Felix The Cat at the same time (I am the Master Cylinder !).

        I love RedState !

        Serious discussion of cartoons, interrupted by fluff political conversations.

        ;)

  • bobojake

    And we are supose to roll over and play dead for this crook to lead the IRS. We didn’t fall off the turnip truck yesterday obama. Let bankrupty take its course as Your TARP obama hasn’t helped anybody and your ARRP(America Rape and Reaping Plan) won’t either. Stand up Schummmmmer, reid, peloski, dodd, frank and obama and take a bow for destroying our economy.

    • Praying

      but actually ENDORSE him, b/c he’s the only one who understands the TARP. Well, if that’s the case, that very fact right there ought to disqualify him! Geez.

  • Kayla

    To me that was his biggest failure and it’s going to be hard closing the door after the horses have left the barn. Now everybody and their dog wants a bailout. When does it stop?

    • mbecker908

      It was just a continuation of his policy of expanding government.

      Don’t expect it to stop.

      • Kayla

        I think TARP was his biggest failure because it paved the way for these $1 trillion dollar stimulus plans. Did you hear Nancy is considering a 2nd bank bailout in addition to the first one and this stimulus plan. And how much do want to bet by March or April, Detroit will also need a 2nd bailout? Bush opened the door and has made it easy for Obama & the gang to implement their socialist agenda. I doubt Obama could’ve passed TARP on his own. Fortunately for him, he didn’t have too, a Repub Prez did all the work.

        • 6eorge Jetson

          on multiple fronts.

          On the other hand, as it involved “only” a $15 billion “loan”. We’ll look back at that number saying “How quaint.”

          As throughout his second term, Bush failed miserably on the communication/leadership front.

        • Praying

          remember, this is the Pork Barrel Spending Bill, not the Stimulus Plan. Minor difference to some, but we should at all costs refuse to even pretend it has a chance of stimulating anything, except the liberal’s agenda.

          • olsmithie

            Good point, it is vote buying in its most basic form.
            There is little or no stimulus, growing the government adds nothing to the GDP.

            Regards

  • 6eorge Jetson

    (1) Bailouts have not worked and President Bush?s failed attempt to solve the banking problems (2) cost the taxpayer $350 billion to date.

    Wrong and wrong.

    (1) The entire commercial paper/ money market was on the verge of collapse. Many companies rely on these financing sources for basic operation. The auto companies, would have been forced to shut down all factory activity, which would be disasterous. (Auto company bankruptcies will not force total shutdowns of productive assets. To the contrary, the imbalances of inputs/output will forced back to a sustainable equilibrium under market supply/demand valuations. Some, i.e. the UAW, won’t like it, but too bad.)

    (2) When you equate the purchase of preferred stock issuances to an unrecoverable “cost”, you take yourself out of the discussion as a credible commentator. One component of the usage of the first $125 billion was to purchase $125 billion of bank preferred stock. The terms were 5% for the first five years and 9% thereafter or until bank initiated redemption of the $125 billion.
    Now there is a cost to paying $125 billion for an investment that is worth less than $125 billion, but it’s not $125 billion. Francis pointed me to an estimate that placed the overpayment in the range of $12 – $36 billion on that $125 billion.

    This is important, because when you throw around $700 billion figure, it sounds roughly equivalent to an $850 billion stimulus package. It’s not. One involves an investment with an uncertain return, the other involves the purchase of a lot of non-returnable stuff and dubious services (e.g. paying off state debt).

    Any more government control of our banking system destroy America?s private banking system and will not solve the problems facing the financial sector.

    That horse has already left the barn. The trouble w/ nationalization is that it crowds out private allocations of resources that are intended to be optimized for economic purposes and not political, unaccountable purposes. Today, there’s nothing to crowd out, however.

    If well educated corporate officials of these banks could not solve their own bank?s financial problems, why would we expect that unelected bureaucrats at the Department of Treasury will magically solve the problems of all of these distressed banks.

    The intervention is not intended to serve the interests of the banks, but rather the functioning of the markets to keep real economic activity going. I’m all for the debate over how to do that most efficiently. If you can find a serious conservative economist that is lamenting that we didn’t “let the market crash”, then please bring that to the discussion. Perhaps ways to use the preserved capital of the smaller financial instituions more effectively. (Another pragmatic problem is that among the debt and stockholders of the largest US financial instituions are the foreigners from whom we borrow hundreds of billions annually. Telling your wealthy uncle to take a hike when you rely upon his $$$ is not a practical strategy.

    Wait until Francis gets home ;)

    • Alberta

      Hate to brake it to you but the system is toast. The options were whether to let it crash right away and rebuild it, or to let it crash softly while we rebuild it. We chose to let it crash softly, which will only serve to increase the time and cost of fixing the problems. When you say point to a credible economist who wanted it to crash, you betray yourself. All economist realize the system was toast. If you dont think allowing the government to serve as ‘the greater fool’ is a collapse of the system, well then I dont know what to say.

      Spreads are a little better than they where during the peak of the crisis, but commercial paper is by no means cheap or even at a ‘reasonable’ level. Its not uncommon to find large scale financing only extended at double digit rates. Im pretty sure the TARP was designed to get rates to a reasonable level. Objectively, TARP failed.

      Ever hear of malinvestment? Realize how malinvestment is a cause of the disease currently? Realize how you are supporting continued malinvestment?

      Also your #2 isnt quite correct. It isnt because you make one huge giant fat Albert sized assumption: that banks will be able to perform at historic production levels. In case you hadnt noticed, all of the talent of the banks that where nationalized left. They are now being run by hacks, essentially.

      Also you assume that the securitized debt that many of these banks hold is still worth something when it clearly isnt. It isnt worth anything because, as Im sure you know, the government owned banks are rewriting the principle these things are pegged too.If you want to play cute and assume a banking system run by second stringers and politicians is going to be able to generate even historic average returns (which where based on risk models that are illegal now) thats fine, but talk about taking yourself out of the discussion as a credible commentator.

  • Brian Darling

    Jetson – (1) The entire commercial paper/ money market was on the verge of collapse.
    Darling – And are you saying that Bush saved the entire commerical paper/money market with the slow distribution of assets to banks through the TARP. You, Mr Jetson, are fear mongering to claim that the US Economy would have collapsed but for the Bush Bailouts. If the TARP program’s purpose was to purchase toxic assets to take bad assets off the books, then why was the program used for a different purpose and why is it assessed as a failure by most economists – both conservative and liberal?
    Jetson – (2) When you equate the purchase of preferred stock issuances to an unrecoverable ?cost?, you take yourself out of the discussion as a credible commentator.
    Darling – it appears that this post is a cut and paste job that does not directly respond to my points. If Jetson thinks the Department of Treasury should get in the business of investing in the private sector, then he does not understand the nature of government. Government will creep toward more and more control of private enterprise the more government money is used.
    Jetson – “Today there is nothing to croud out.”
    Darling – BS. You are saying that a federal takeover of banks would not croud out “private allocations of resources that are intended to be optimized for economic purposes.”. It would. Do you believe in private enterprise at all. Please provide authority for that statement for that assertion. Don’t cut and paste another response that is off point.
    Jetson – If you can find a serious conservative economist that is lamenting that we didn?t ?let the market crash?, then please bring that to the discussion.
    Darling – more fear mongering. The market has already taken a hit, please provide evidence that a wholesale collapse of the market was about to happen. Please do not quote Paulson or Bush for authority.
    My only question to you Mr Jetson, is in what office to you currently work at the Department of Treasury, because only somebody who worked at treasury could come up with such ridiculous argument.

  • ScorchedBlue

    Drop or modify the stupid Mark to Market rules that have driven these banks into the ground… even while many of them have been cash flow positive. The only reason these assets are “toxic” is because the government will make you mark them down to zero even while they continue to produce cash flow and positive ROI.

    • http://www.hakubi.us/ Neil Stevens

      Nobody wants to invest in a company that doesn’t mark its assets to the market. They’ll have to do it anyway.

      • ScorchedBlue

        A german bank recently performed the change and investors cheered raising its stock. let them be transparent about how the assets are held and about what their cash flows are. if you want, make them hold them for a period of time if they take them from mark to market – to show the cash flows are real.. Other than that, who cares what the market says, so long as the cash flows continue.

    • zuiko

      But it’s accounting gimmickry. If banks aren’t marking their assets to market, they are cooking the books. Their balance sheet is wrong. It does not accurately portray their assets, and is greatly overstating what they are worth. Is that any kind of solution? I don’t see how.

      • ScorchedBlue

        Was it accounting gimmickry to do this as of November 2007 when the new rule went into place? Was it not accounting gimmickry before? What about the banks that didn’t use mark to market for their Mexican currancy positions in the 80′s? You know, the ones that would have all gone out of business if we’d enforced this stupid rule.

        But, it has even less validity now. Not only do are many of these assets cash flow positive, but there are underlying mortgages that can be analyzed to come up with a much better value. The problem with Mark-to-Market is that it is the ultimate in “cooking the books” for these assets. When times are good they vastly overstate the balance sheet.. when times are bad, they vastly underestimate the balance sheet.

        McTeer has seen this for a long time. Volcker is now on board as well. How long will it take for more people to do the math and prove to themselves that the charge of “cooking the books” has little, if any, validity.

        • zuiko

          Investors need to know what the company’s assets are actually worth, today. Not what they could theoretically be worth down the road if they perform like the company expects them to perform (which is also bound to be overly optimistic). Now, I don’t have a problem changing bank capitalization requirements to use a different method of valuation. But the reports to investors should certainly continue to be based on mark to market values whenever possible.

          A lot of people have been complaining about companies having to report massive paper losses because of their assets being written down. They *should* be taking these losses on their quarterly earnings as it represents the reality of the situation. Just because we don’t like that reality doesn’t mean they should cook the books to avoid having to disclose it.

          • Mario

            My proposal is quite a bit smaller (and promises to be more effective, but Democrats don’t really care about that part). I’m not sure where you got the idea about “handing the reins of the entire financial infrastructure,” I’m talking about creating a single bank; a bank that competes with other banks, but is designed so that people will not want to do business with it unless they have no other option. A bank of last resort for the credit-worthy. The rest of the industry would remain in-place and unaffected. Once the industry is able to get their finances in order, whatever part of the market the “Last Bank of the United States” served would be theirs for the taking. It is designed to die off once it isn’t needed.

          • randy streu

            however, here’s the problem as I see it. One of them. Unless and until somebody else comes into power, it is unlikely the bank WOULDN’T die off. Democrats seek power… they don’t give it back. What’s to stop that bank — a government-subsidized bank, by the way, with a great deal more potential capital, and far to powerful to actually compete against, should they choose to go that route — from buying out other banks, rather than simply allowing itself to “die.”

            Plus, let us not forget what happened with those other gov’t subsidized lenders, Fannie and Freddie. Is this administration really capable of creating a better system than those two failures?

          • Mario

            You’re right, I think that’s the biggest problem,. My hope is that the bank idea would be introduced in full and written into law with all restrictions. It wouldn’t solve the problem, but it would at least force Congress to take positive steps to change its mission. Later on, I think private bank lobbying would be enough to make sure that the bank died as it was supposed to, given that it has the potential, if the restrictions were lifted, of killing off the entire private bank sector. Since that is what we are facing right now, however, I think the risk is worth taking.

          • randy streu

            are big government or slightly less big government. I know those are pretty much the only options with Barry in the White House… but I don’t believe it’s as bad out there as he says it is.

            I know it’s too much to “hope” (I think that word is going in quotes every time I say it now… that and “change”) that the Market is allowed to deal with this as it should be… but I do have to wonder if we may yet avoid a government bank.

    • lapert

      The assets aren’t toxic becuase of anything the government (or more accurately the non-governmental FASB which sets accounting standards) does – they are toxic because no one is willing to buy them because they doubt the certainty of the future cash flow and positive ROI.

      In no way is eliminating mak to market accounting a ‘conservative’ option.

      • ScorchedBlue

        they aren’t toxic because they doubt the cash flows are positive ROI. If that was all the question was, people could do that analysis and find a vulture level at which people would buy. No problem.

        The problem is that when you have them on your books – you are under the threat of regulators shutting you down for good unless you come up with millions.. billions and maybe even trillions of cash.

        If you think it is only the lack of certainty about the cash flow.. then take out the M2M and see how many buyers there are.

        • lapert

          First, investors that are not bank are not under threat by regulators to shut down if they choose to hold investments that are cheap now – if people out there thought that these assets were safe for recovery in valuation someone would buy them. Second, the only reason a bank who holds the assets would be at risk is if they hold so muh of assets that are at risk of value collapse relative to total capital – and that is a pure risk management failure (which is exactly what happened in many banks when they underestimated the default risk correlation across various CDO products).

          Furthermore, if you had the assets on the books fr the purpose of collecting the cash flows, and ot sell as an investment, you never fair valued them in the first place.

          Did you listen to any of the SEC hearings on fair value? If you think investor confidence is frozen now wait till you allowed banks to hide all valuations in their own models.

          It would almost be funny that people have taken an accounting rule as a scapegoat if some of them (or at least some of their followers) didn’t actually believe that it would change the underlying reality.

          • ScorchedBlue

            Going backwards.. first of all, why listen to the SEC? they put in the new rules in November of ’07, and then issued a meaningless confusing clarification in March of ’08, then fiddled around trying to figure out what was happening for months while everything melted down. Listening to them isn’t helping much.

            You state, “f you had the assets on the books fr the purpose of collecting the cash flows, and ot sell as an investment, you never fair valued them in the first place.” Did you both to read my post? I was making the point that the broad disparity between the cash flow and the market price pointed out the fact that this market wasn’t working and that Mark to Market wasn’t working.. If you want, you can explain to all of us how you value an asset like this.. when the information you get on other trades is likely to be limited and when the type of asset may have nothing to do with what you own on your books.

            It was a risk management failure, but who would have thought that the market price would drop due to a panic to a point so far below what any sane valuation would indicate based on relative cash flows. Who would ahve thought that the November ’07 FASB 157 would have the impact that it has had.. obviously not the SEC.. but then again, we already knew that.. Should we punish everyone because the SEC is too proud to admit they screwed up?

          • lapert

            First, the SEC does not make accounting standards – FASB does and they do not report to the SEC in anyway. Second, most banks early adopted FAS 157 in January 2007 because it improved their balance sheets – when assets value started to decline they were no longer so happy with having to face up to it, but it was the underlying change in the market, not the accounting rule, that drove that. Third, the clarifications last year were not confusing at all if you were an accountant who foucsed on valuations. Third, the SEC didn’t fiddle around at all, they held several public forums on the issue and heard from all constituents and released a report on the congressionaly mandated timeline which said what everyone who has any clue already knew – mark-to-market was not the cause nor even an accelerator of the crisis, there are some nuances of the rules that can be improved but it would have a negative impact on our capital markets if they were suspended. And most importantly, governmetn should limit its interference in setting accounting standards if we want to maintain credibility in the global marketplace.

            Now, how do you know the disparity between current expected cash flows and market prices shows the market isn’t working? Maybe it shows the cash flows won’t materialize? The basis of free market capitalism is that, while markets don’t know the future, they are the best gauge we have – so why would we prefer to rely on management’s assertions rather than a market price? If you want details on how to value assets that have no observable market price etc. I could provide them (it won’t be short) or you could read the accounting literature around the various models you can use – FAS 159 requries that you disclose your decisions and models so be honest in your choices…

            And for your last paragraph – will Nissin Taleb for one but if you ask he will be happy to tell you for himself. But your assertion that FAS 157 had the impact that it had is just a false one – again it was the underlying markets, not the accounting rule that makes you report on them, that caused the crisis. Everyone is being punished because of poor risk assumptions and models in the financial services industry coming home to roost – not because the SEC is too proud to say anything about accounting rules that they neither wrote nor published.

          • ScorchedBlue

            suffice it to say that it would be great to have your level of certainty, but I don’t believe your position warrants that certainty… If so, why would Volcker be talking about it? Why would McTeer be talking about it? Why would the ABA be talking about it.. AND if the SEC has been so clear, why would the ABA continue to ask for clarification.

            As for the cash flows.. well, maybe they won’t materialize and maybe the value of housing in the US will go to zero also…

          • lapert

            They are talking about it because that is what they do – talk about gibberish while real people do work particularly when they can use it to avoid doing something that actually impacts issues.

            When Accountancy Age did a poll, it was 3 to 1 against suspension, when the CFA did a poll of investors it was 3 to 1 against suspension, when the Controllers’ Leadership Roundtable polled Corproate Controllers it was 2 to 1 agains suspension. If you listened to the SEC forums on the issue, you would understand that almost everyone dismissed the scapegoating and moved on to productive disucssion on improving the mechanics of fair valuation.

            And again, SEC does not issue accounting pronouncements – at least if you are going to insist that rules are unclear blame the right group.

          • ScorchedBlue

            polling the rank and file is the best way to run any system of this important? sheesh, I never would have guessed it would be so easy to make policy…

            And McTeer and Volcker are politicians…?

            Nice that you used a particular wording there “does not issue accounting pronouncements”. Well, sort ot. They didn’t issue FAS 157, but. they do issue pronouncements.. like this one:
            http://www.sec.gov/news/press/2008/2008-234.htm
            or doesn’t that count.?

            You seem to want to set up a straw man where one is either for or against all M2M. In this case, the biggest problem is that there is no “market” against which to value. More accurate model valuations can be done, but the SEC and FASB have not given sufficient guidance around that to this point. It’s a mistake. As you said, they went on to discuss mechanisms of fair valuation which is good, because that is the issue here and that has been the issue.. and that was the issue with their insufficient March 2008 statement as well.

          • lapert

            I’d much rather see a poll of serious investors of what they think is important information to be disclosed than some individuals – no matter how much they think themselves experts.

            And that press release of yours is not an accounting pronouncement. It also was jointly released by FASB and the SEC and its clarifications did not provide new information – all those answers had been given to individual questions before that by FASB. If you read it you would note that it says FASB is preparing additional guidance – not the SEC or the SEC and FASB jointly as used elsewhere in the document.

            And FAS 159 contains plenty of guidance on the use of models when directly observable prices are unavailable – and there are plenty of accountants out there who would be happy to help you build your models (or sell you there own broker quotes) and appropraite disclosures for their consulting fees.

          • Mario

            I actually think it’s an idea that could work (without betraying free market principles). The idea is that all of the funds bailing out the private banks would instead be used to fund the national bank, provided that the bank is run just as a normal business except that the terms for all loans are slightly worse than the free market is offering (terms are shorter, interest rates are higher, whatever). This would provide an opportunity for qualified people to get loans when the private banks simply won’t lend, but it would also provide maneuvering room for the real banks to eventually take the market back over. When the national bank is no longer needed, it’s customer base will simply dry up. Then the loans it originated could be sold to the newly solvent private banks and the national bank would be shut down.

            I don’t think the banks are capable of solving the problem on their own right now, but I think this idea would allow them to slow down lending (as they are doing) without overly slowing the economy. In short, I think a modified Option 1 is the only way to achieve Option 4 with a minimum of pain.

          • randy streu

            “This would provide an opportunity for qualified people to get loans when the private banks simply won?t lend…”

            Private banks don’t issue certain loans because they are bad risks. That’s number one.

            Number two, that is taxpayer, not government, money. A plan like this gives government FAR more, as well as more far-reaching, authority and control over money and finance.

            You give government access like that — especially government currently run by people with demonstrated desire for MORE government control over EVERYTHING… you are absolutely begging for trouble.

          • Mario

            Right now, banks are turning away qualified applicants because they are more interested in deleveraging than making loans. That’s fine, by the way, it’s a perfectly valid business decision, particularly when there is the looming threat that the government will step in and wipe out your shareholders. In the meantime, though, it’s adding to the country’s financial problems. We need someone to step in and make up the difference while the private banks get their house in order, and I think this is the closest thing to a minimalist approach we can hope to see.

            We know that the government is going to do something — the people want to think the government can help and Congress wants to pretend it has the power to do so. The only question is what will happen, and, in the absence of plausible, moderate proposals, I can guarantee that their solution will involve a lot more government intervention than mine, and will be much harder to remove when the crisis subsides.

            We don’t have the option of a non-government solution, so the smart thing to do is work with the hand we’ve been dealt and help make sure that the government does as little damage as possible.

          • randy streu

            over to Barack Obama is the path of least resistance? You’re kidding now, right?

            Of COURSE it will be a big government solution… but I certainly don’t think we need to step in and let him make it bigger than it has to be.

      • 6eorge Jetson

        Under Obama and the Dems, heck no. And a permanent nationalization would doom the US to the much lower European “growth” experience.

        I was hoping that Francis Cianfrocca would arrive to provide richer, more authoritative evidence (and a first-hand, in person account) as to the brink of catastrophic failure. (I am not worthy.)

        You can see his thoughts in this RedState diary discussion
        His forward-looking take is focused on how to get out of the already present defacto US banking system nationalization over his suggested period of 3 -5 years.

        And I fully agree that Republicans, namely flagship bearers Bush and McCain “have opened the door for unprecedented government instrusion into private enterprise.” For the sake of argument, let’s consider a parallel world in which the only difference was that TARP I was not passed. Do you think the US would fare any better today in the abstract measure I call “degree of socialist sentiment at the end of term/campaign?” I don’t see it, and so I don’t see TARP I as an enabler or its absence as anyway constraining Obama and the Dems. Because they’d do it anyway.

        And I can’t lower my second term “communication and public sentiment leadership” grade for Bush due to his proclamation “I’m abondoning free market to save the free market.” Mainly because there are no grades below F.
        (I’m much kinder to Bush in actual policy, in fact in the A- range for foreign policy.)
        That was a very stupid way to characterize it.

        And so my grades stand as

        Handling of the immediate credit crisis = PASS (What I believe was an emergency)
        Degree of socialist sentiment at end of term = FAIL
        Expectation of long-term Obama policy consequences = FAIL

        If Francis doesn’t chime in by tomorrow night (Monday), I’ll do my best as the JV squad to answer your request for evidence of a meltdown in a diary entry. ((Sneaks off to bed, kicking the can down the road for a day hoping not to do the work))

        Finally, I apologize for any disrespectful language. That the blame for the credit crisis got pinned on Republicans is 6eorge Jetson’s #1 pet peeve/hot button. I blame Bush and McCain for their failure to communicate for that. (If I was Obama, I would have just sat back and laughed at their communciation incompetence, too.) And so I have a bee in my bonnet to get these attributions correct.

    • 6eorge Jetson

      Savings and Loans, holders of 6% fixed-rate mortgage pool assets, suddenly found themselve facing short term financing costs of 10%. Not a winning business model. But due to the lack of MTM, they had time to try to find themselves a way out. Of course, there was absolutely no sure ways, but there were Hail Marys. Those didn’t work out to well.

      (As commercial bank portfolios were weighted toward variable rates–you don’t lend Joe’s Hamburger Joint at a fixed rate for 30 years–they did not face the issue that started the fall of the Savings and Loans.)

  • Rod_Patrick

    Nationalizing A, B, ….., Z, AA, ….. is just so natural to this new administration.

    I am more worried about Obama’s nominee to the SCOTUS later.

  • 6eorge Jetson

    were all off the top of my head. In the past I’ve worked in research, so I don’t claim to be the top expert here (Francis plays that role), but I know enough to see gaping holes in your analysis.

    And are you saying that Bush saved the entire commerical paper/money market with the slow distribution of assets to banks through the TARP.

    No. It also took a $2.2 trillion expansion in the Fed’s balance sheet in higher quality assets.

    Look at the spread between the Fed target rate and 3 Month libor back in October versus today.

    Keyrates as reported by Bloomberg

    October 3.54 – 1.50 = 2.04 bps
    Today 1.17 – 0.25 = 0.92

    Usually, this spread is on the order of 10-20 bps. The fear level of January is less than the fear level during the peak of the crisis.

    If the TARP program?s purpose was to purchase toxic assets to take bad assets off the books, then why was the program used for a different purpose

    This critic of the path chosen deems the original plan to be the least cost-effective of all the plans.

    What price should the taxpayers pay to get the toxic assets off the books? The Treasury soon discovered that your’s or my guesses would be just as accurate. Paulson injected the capital in a different manner, following the cue of the British with a method involving less of a wild guess.

    and why is it assessed as a failure by most economists – both conservative and liberal?

    A failure versus doing nothing, or a “failure” in that a better course could have been charted. Yes, Paulson acted as if he was making it up as he went along. Because he was. Was TARP I worth this same University of Chicago economist’s estimated true cost of $108 billion versus doing nothing? I don’t see “do nothing” as a recommended course in his latest commentary (Monday morning quarterbacking in regards to TARP I). from a professor of the free-market champion University of Chicago

    If Jetson thinks the Department of Treasury should get in the business of investing in the private sector, then he does not understand the nature of government. Government will creep toward more and more control of private enterprise the more government money is used.

    That’s why the purchase of “preferred stock” was chosen. “Preferred stockholders” do not exercise voting rights. They are “preferred” in that they are one step ahead of the last claimholders, the common equity shareholders (that get the entire residual or zero if there is none.)

    Private markets perform their optimized allocations based on market prices. Of course, that assumes that a price exists. What degree of a capital injection was necessary at the time was not known ex-ante. Whether Clesuea-like or not, the money market meltdown did not occur.

    My only question to you Mr Jetson, is in what office to you currently work at the Department of Treasury, because only somebody who worked at treasury could come up with such ridiculous argument.

    No, I wan’t conservatism to be advanced in practice, not just in abstract blog rants. There weren’t a lot of great options for Bush/Paulson. And now Mr Obama calls the shots. (Though the alternative was McCain. Sheesh.) Do you think Obama broke the 50/50 September poll tie to win handily because of the TARP or because of the credit crunch? I’m going to go out on a limb and say the credit crunch. Or more accurately, McCain’s and Bush’s failures to articulate the causes of the failures.

    When we oversimplify and bash a bad outcome under a Republican administration without thoughtfully considering the complex underlying framework, we only create noise and open the door even further to Democrat’s hunger for socialism.

    To summarize, TARP I was executed in a hurry. I can live with the good (or lack of disaster) and the not perfect. TARP II, the stimulus, do not share an immediate NOW! urgency. (Soon, but there’s time for debate.) Options like those raised by the Chicago economist should be debated. Plus we all darn well know the Dems will use the opportunity to expand government.

  • 6eorge Jetson
  • Brian Darling

    George — do you agree that a nationaization of banks would be a mistake? That was the thrust of my piece.
    “To summarize, TARP I was executed in a hurry. I can live with the good (or lack of disaster) and the not perfect. TARP II, the stimulus, do not share an immediate NOW! urgency. (Soon, but there?s time for debate.) Options like those raised by the Chicago economist should be debated. Plus we all darn well know the Dems will use the opportunity to expand government.”
    Here is my problem with your statement — TARP set a dangerous precedent by a Republican President. Bush said that he “chucked aside some of his free market principles” to allegedly save the economy. You claim that a modest change in LIBOR rates are conclusive evidence that TARP worked. I disagree and see Obama using the Bush precedent as a pretext to nationalize our banks. If this happens, Bush started us down that road. I have a problem with the precedent set and the fact that Treasury chose to “purchase preferred stock” over other options does not help me to sleep at night. Republicans have opened the door for unprecedented government instrusion into private enterprise.
    You make a compelling argument, but I want your evidence that the US Economy was on the brink of catastrophic failure. You have yet to provide that evidence. Merely saying that if we did nothing the economy would have collapsed is not good enough for me and, yes, I firmly advocate for the federal government to sit on it’s hands and DO NOTHING. Govenment has horribly mismanaged the Bailout and, accepting your pricetag to the taxpayer of just over $100 billion for the first traunch of the TARP, I think that is too much money to waste.
    George – I am glad that we are having this give an take. Please answer me one quesiton – Do you trust the government to solve this problem? I sure don’t

  • http://reiboldt.com Mark Reiboldt

    educated in Europe and I can tell you that Keynesian theory is not what my school taught was most efficient. Indeed, my studies were centered around the Chicago School, so it is actually the US economists like Paul Krugman and his band of liberal DNC operatives who are driving the nationalization of US banking assets. Please to clump European economics into the garbage that is coming out of US university economics programmes these days (with the exception of Mankiw and the UofChicago).