More Arguments for Bank Nationalization

Why have shares in Barclays suddenly cratered? No one really knows, but it’s surely not a complete coincidence that the short selling ban on UK financials expired today.

On the other hand, maybe Barclays shareholders were reading Willem Buiter, who put up a blog entry today headlined "Time to take the banks into full public ownership". Buiter’s argument — which applies just as much to the US as it does to the UK — is that the only way to get banks lending again is to nationalize them. Otherwise, they’ll simply hoard liquidity in a desperate attempt to avoid being nationalized.

Buiter notes that the enormous practical problems associated with the creation of a "bad bank" simply disappear if the entire holding company is 100% owned by the government: "It would be a redistribution of wealth from one state-owned entity to another state-owned entity", with no fiscal cost at all and no problems associated with the value placed on the bad bank’s assets.

Having the government take over the banks — as the US government should do with Citi and Bank of America — also elegantly puts to an end the ludicrous situation whereby shareholders, whose holdings have been effectively wiped out already, still nominally control the entire company. Having already suffered nearly all their maximum downside, shareholders of an insolvent bank have every incentive to support hail-Mary passes and any policy which creates a chance, however small, that their equity will be worth more than zero in the future. But a sensible too-big-to-fail bank can’t be run on such a basis.

So long as the big banks aren’t nationalized, they will be hobbled both at management level and in the stock market by the fear that they might be nationalized. Since no government can — nor should it — credibly promise not to nationalize its biggest banks, the only sensible option is to just go ahead and do it already. The only question is what price to pay, and whether to make preferred shareholders whole.