Where’s the Nationalization Debate?

There’s a lot of words but less actual news in the NYT’s big report today on Tim Geithner and his plan for the US banking system. But one thing does interest me, given the extent to which Warren has been demonized by bank shareholders: financial stocks surged yesterday on the same day as the above photo was taken, with Geithner and Warren looking very friendly indeed.

I do like this quote from Chuck Schumer, which I think sums up the debate quite well:

“None of the solutions are very easy,” Mr. Schumer said. “All of these proposals sound very appealing until you start to examine them in detail. And then you find that all of them have problems. The good bank-bad bank idea — the problem, first and foremost, is how do you value the assets? No one knows how to do that.”

But the nationalization idea still seems to be stillborn:

[Geithner] discouraged speculation that the plan would include the nationalization of some banks.

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” he said.

Such sentiments will certainly make Jamie Dimon happy:

"JPMorgan would be fine if we stopped talking about (the) damn nationalisation of banks … we’ve got plenty of capital," Jamie Dimon said, at the annual meeting of the World Economic Forum in Davos, Switzerland.

Sorry, Jamie, but I’m going to keep on talking about it, just because it solves at a stroke the problem of valuing the bad assets that the government is thinking of buying at an absolutely astonishing cost of $3-4 trillion. It would also help address Larry Summers’s concern:

Mr. Summers privately expressed concern last week that spending too much to buy bad assets could cripple the dollar, according to a person who spoke with him.

This is a real concern. If you give the banks trillions of cash dollars in exchange for their toxic assets, there’s simply no way of forcing them to keep that money in the USA. Even if they lend it only to US companies — which is improbable — those companies will surely take advantage of the strong dollar to buy cheap imports.

Nationalization, by contrast, doesn’t involve monetizing bad assets, which means it poses much less of a risk to the dollar. I’m glad that Geithner isn’t in a mad rush to decide what to do, but I’m less happy that some kind of bad-bank solution seems to be a foregone conclusion at this point, while nationalization has not been properly debated. If you don’t want to call it nationalization, fine — but at least take seriously the idea that the problem can be solved without a huge up-front transfer of government money to the banking sector.