“WE’RE ALL Swedes Now”. So said oft-quoted finance professor Nouriel Roubini last week, calling for large-scale nationalisation of the US banking system. With agreement on that point even from thinkers on the right of the political spectrum, Roubinis Swedish comparison is looking less exaggerated by the day.
Alan Greenspan stunned many when he said this week it might be necessary to “temporarily nationalise some banks” to engineer a “swift and orderly restructuring” of the broken sector. “Once in a hundred years this is what you do.”
Greenspan’s view was echoed this week by Greg Mankiw, a Harvard professor and one-time adviser to the Bush White House. Mankiw said many were repulsed by the idea of nationalisation because it was a sign “of the depth of our problems”.
Others – including himself – “do not want the government deciding who deserves credit and who does not, what kind of investments are worthy of financing and what kind are not.
However, if banks were as insolvent as so many analysts have estimated, “then the goal should be a massive reorganisation of these financial institutions”, including equity holders being “zeroed out”.
Senior Republican politicians have been making similar noises. New York congressman Peter King and South Carolina senator Lindsay Graham have called for a debate, with the latter warning against “pouring good money after bad”. “If nationalisation is what works, then we should do it,” he said, adding that defeated presidential candidate John McCain was just one of many Republicans who believed that the subject should be on the table.
The seemingly intractable financial crisis has seen nationalisation chatter become increasingly common. Nobel economists Paul Krugman and Joseph Stiglitz have advocated it, as has market guru Nassim Taleb, the increasingly ubiquitous Roubini and a growing number of market analysts. However, the migration of more conservative thinkers like Greenspan and Mankiw to the nationalisation cause is a new development.
Currently the obvious US candidates for nationalisation are Citigroup and Bank of America. However, rising delinquencies on mortgages and credit cards and the deteriorating economy mean some analysts have suggested that even healthy-looking banks like JP Morgan and Wells Fargo might well be near insolvency by the time 2009 comes to a close.
Sweden, which successfully cleaned up its banking sector via nationalisation after a financial crisis in the early 1990s, is often cited by US nationalisation advocates. President Obama recently stressed his admiration for Sweden’s swift and decisive approach before going on to caution that the American situation was more complex in that it had “thousands of banks” whereas Sweden had just five.
However, America’s banking problems are generally considered to be largely confined to its six biggest banks.
Obama’s reticence is more likely related to the fact that Sweden “has a different set of cultures in terms of how the government relates to markets”. Nationalisation, as George Soros said, remains “politically and culturally unpalatable”.
Treasury secretary Tim Geithner, too, has said that governments are “terrible managers of bad assets”. That doesn’t mean that nationalisation is off-limits. Geithner recently outlined a plan to stress-test the banks, with the weakest being required to raise capital.
With the private sector almost certain to be unforthcoming, some kind of government intervention will likely ensue – a move that many describe as “creeping nationalisation”.
