The Problem With 'Nationalization'

Unlike Sweden, Congress would quickly politicize seized bank assets.


By GERALD P. O'DRISCOLL JR.

The chorus for nationalizing America's struggling banks is growing louder, and support for the idea comes from strange sources.
Alan Greenspan has said that he understands that "once in a hundred years" the government needs to take over the banks, and now is the time. Sen. Lindsey Graham, a Republican from South Carolina, has called for doing what works and "if nationalization is what works, then we should do it." That is the kind of pragmatism that leads to socialism.


There is a great deal of imprecision in all the talk of nationalizing banks. The government, through the Federal Deposit Insurance Corp. (FDIC), temporarily takes over insolvent banks when it closes them. When it can, the FDIC sells a failed bank to another institution. Sometimes the purchaser does not want some or any of the failed bank's assets. The FDIC must either then pay the buyer to take the assets (subsidize expected losses) or take over those assets. In a limited number of cases, there is no buyer for a failed bank. IndyMac Bank is a notable recent example. It has been operated since last year as an FDIC-owned institution (IndyMac Federal Bank) with the goal of finding a private buyer.
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Mr. Geithner wants a public-private partnership to buy toxic assets from banks. All that government has done thus far has only scared private money off. As bankers now realize, when you turn to the government for financial assistance you take on an untrustworthy partner. Outside money will not come in only to see its investment diluted later on when the government injects additional funds.
Rather than focusing on ways in which we can further involve the government in the financial system, we need to find ways to extricate banks from government's deadly embrace. Banks, at least the behemoths, were public-private partnerships before the crisis. Deposit insurance, access to the Fed's lending, and the implicit (now explicit) government guarantee for banks "too big to fail" all constituted a system of financial corporatism. It must be ended not extended.