There's one necessary element to the recovery Obama isn't talking about: Nationalization

[HamdenRice]

It's depressing that the American public's fear of "socialism" could scuttle any chance of recovery.

It's pretty obvious that there is one relatively cheap and extremely effective tool that the Obama administration must adopt to get the economy going again: full nationalization of at least one, and probably three or more, large commercial banks.

Right now, the main problem is still an almost complete freeze of credit. This freeze is partly irrational and partly one aspect of a bad self-fulfilling prophecy.

Lenders are terrified of lending to businesses and consumers as we head into a recession. But not lending is making the recession a certainty.

It's time to exercise the Paulson warrants, and purchase the last few billion of common stock (which is so cheap it's almost worthless) and simply take over several of the big banks. Then it can start lending, cleaning up balance sheets, re-engineering asset backed securities, and above all making nice with the Chinese and Japanese and Gulf states, without whose trillions in circulation, the world economy will continue to collapse.

Unfortunately, the propaganda about Obama being a secret socialist before the election has made this virtually politically impossible. But without nationalization there can't be a recovery.

[ixion]

1. nationalism is not the answer, imo

so I would disagree with your thesis there.

All nationalizing will do is increase the size of the monolith. It won't solve any financial woes.

[dynasaw]

2. I Respectfully Disagree

We're already "nationalizing" industries with mega bail outs, but with no regulatory guidelines or notions of expected outcomes.

The nation has been bankrupted by laissez faire free market capitalism that has allowed financial institutions and corporations to essentially run amok.

If tax dollars are going to be used to support these industries, and they have been to a much greater degree than most people realize, then I think it only fair that the American government, and the people whose tax dollars are being pumped into these corporation, have a greater stake into how these industries are being run.

In countries where industries, oil, and agriculture are nationalized gaps between the top wages for CEOS and worker wages are much smaller than the obscene gap we have here in the U.S. and worker rights and benefits far more equitably monitored. Profits from resources tend also to be cycled back into nationalized services. For instance, in Scandinavia profits from North Sea oil which is state owned, support health and social services rather than going into the private pockets of corporate fat cats. It's time America moves away from the largely unfounded fears of "socialism." You would think we'd have had enough to know that the Republican mantra about free market capitalism has failed monumentally. We voted for change, and nationalization of financial institutions and the auto industry should be one of the areas the new administration should seriously be considering.

[notesdev]

14. What are we getting for the bailout?

Not the Treasury, nor the Fed, nor the banks want to tell us. This last one has to be considered to be a total waste.

The answer is not to throw more money into the endless pit of bankers' appetites. The answer is to let failed companies fail, making room for a healthier company to take its place. Honoring the deals of financial pirates should have no priority.

[GliderGuider]

3. How about Regionalization?

It seems to me that nationalization is only useful if you want to try at all costs to maintain business as usual. In these circumstances there's a good case to be made that BAU is simply not maintainable over the long haul. Resilience theory claims that any complex adaptive system will grow in complexity and efficiency, shedding resiliency in the process, until a limit is reached.

At the limit, external shocks that were easily absorbed when the system was simpler and smaller overwhelm the necessary interconnections that served to maintain the system's integrity. That leads naturally to a dis-integration and a release of system resources, followed by a reorganization period before the next growth phase begins (this is known as an adaptive cycle). The implication is that trying to maintain the integrity of such a system in perpetuity is theoretically impossible. Modern industrial civilization, especially as expressed through globalized trade with its dependency on long non-redundant supply lines, is such a system.

Nationalization seeks to maintain the system longer by increasing its efficiency still more. As resilience theory points out, in the long run that approach is a mug's game. Since we may be entering the release phase of our current cycle of civilization, it would seem sensible to plan for a fragmentation of nations and economies into smaller domains, where the span of control is shorter and the requirements for complexity not so high. Bioregionalism is one philosophy that addresses this concern directly.

[HamdenRice]

4. Word!

Salad!

There are too many false premises built into your analysis. That said, I've consistently written that it was not the repeal of Glass-Steagal that set the banking sector on course for the current crisis, but the earlier Garn-St. Germaine act, which ended the system of highly localized thrift institutions as the main sector of consumer banking.

So I would agree that after nationalization and stabilization of the banking system, an anti-trust style break up of some mega banks into regional banks would be wise -- for the systemic/stability reasons you point out. Unfortunately, because of the requirements of world trade (which isn't going away), the country will need some large global banks in order to be able to compete in the global economy.

[tama]

6. Then

let's talk about premises. What are yours?

[GliderGuider]

7. Speaking just about the banks,

If a number of banks were nationalized, wouldn't that make it harder to break the system up rather than easier? Once the consolidation under government control is effected, reversing the process may not be defensible (or even feasible).

On the question of world trade, we'll obviously keep banks of sufficient size around to deal with the volume of trade that's going on. I expect the volume of international trade to fall off dramatically over the next two years and to stay relatively low for a long time after that, but that's just my opinion. If that happens, the banking sector will respond by downsizing organically (but not painlessly). Overtly planning for less world trade would be politically unpalatable, though, so we'll plan for growth like we always do. If that growth fails to materialize within an economic timescale (say 5 years), the banking sector is likely to follow the adaptive cycle path I described above, whether it's nationalized or not.

[HamdenRice]

8. "If a number of banks were nationalized, wouldn't that make it harder to break the system"-No

Once the government owns all the voting stock of a bank, it becomes infinitely easier to break that bank up. Doing so by anti-trust laws is time consuming, and often politically difficult to the point of impossibility. You might check out the history of the anti-trust cases against AT&T, IBM and Microsoft.

Once the bank is nationalized, the federal government has all the voting power. There will be no bank lobbyists going to Congress asking the Justice Department to stop anti-trust action, and in fact, no opposition whatsoever. With all voting common stock, it becomes much easier to spin off divisions and operations.

As for world trade, the point is not the size of the assets of the bank. Whether you have one $100 billion bank or two $50 billion bank, you have the same assets to lend.

The problem is the geographic distribution of branches and operations. World trade requires the issuance of letters of credit, which requires branches in many ports and trade centers. To support the overhead of that infrastructure efficiently, the bank needs a large asset base.

[GliderGuider]

9. What's the difference if you have branches of one bank in many ports

or different banks?

[HamdenRice]

10. The process by which international trade is financed...

often requires the same bank on both sides of the "ocean."

[GliderGuider]

11. In that case it sounds like the process needs changing.

All that's really required is mutual trust and an enforceable agreement between two banks, no? Hmm. That's what's breaking down right now, isn't it?

So, we're heading towards a world of nationalized oil companies and nationalized banks?

[anigbrowl]

12. For a change, I largely agree here

But the problem is trust. For example you're in China and you want to buy Australian iron ore to make steel, but they don't want to ship without a letter of credit. So you call up 1st Shenzen Bank or whoever it is; they know you're good for it, but the bank in Australia doesn't trust their letter of credit and wants the money up front, while you would rather not tie up the cash for the 3 weeks it's going to take to ship the ore over to you (obviously, I'm being simplistic here, but my point is that the credit arrangements often need to be made weeks or months in advance of delivery).

I share your skepticism about large global banks that are 'too big to fail'. But they'll continue to have a role for the time being, as the whole world doesn't operate on the same standards of financial reporting and auditing. International accounting bodies are trying to standardize, but that effort is likely to slow down somewhat given the current problems of the western financial sector, which was (supposedly) the poster child for how to do it.

Meantime, what we have now is an excess of risk-aversion among commercial institutions. I think Hamdenrice is onto something with the idea of temporarily nationalizing some banks, but there are significant risks involved. Within a strong domestic market (eg the US) the impact on competition is tolerable and likely temporary. but if it gets into international financing then people in different countries will question the independence of central banks' monetary policy from treasuries' economic policy; trade imbalances and currency defensetake on the appearance of economic aggression and may be exploited by reactionaries who argue they are a proxy for war and thus a casus belli. One would need very solid multilateral ties in place to prevent accusations of economic adventurism by state actors.

There's also the more general but equally tricky question of how to handle situations where the public interest (as owner of the bank) conflicts with the public interest as consumers of the bank's services. For example, from the treasury's point of view, lookin out for the interest of all taxpayers, it may be wise to continue charging $35 fees on things like unauthorized overdrafts or late payment of loan installments. On the other hand, paying the same fees to the 'the gubmint' is likely to arouse as much or more political resentment than paying it to private shareholders.

Taxpayers are not going to be happy to pay fees to an instution which they nominally own (even if they already do so, eg on student loans). Imagine if the government took over Bank of America, for example- they're not the worst, but they're not exactly that fun to deal with either if you're not well-off. So every time BofA charges a fee to the customer (even if it is 100% legitimate), you're going to see complaints like 'Barack Obama stuck his hand in my pocket AGAIN...'. More serious commentators will accuse such a bank of catering to rent-seekers and accuse the administration of engaging in 'neo-mercantilism' and suchlike.

It may be workable, but it's nonetheless tricky. I'm sure Obama's people are keeping a careful eye on how the UK is handling the involuntary nationalization of Northern Rock. Regrettably, to make up for that embarrassing situation the UK government seems to have given a green light to the other large banks there to consolidate further. I like the Swedish approach too, but I'm not sure it automatically scales. I also seem to remember a lot of ripples in other markets; there may be no connection, but i wonder if some of the capital outflow from Sweden and the other Nordic countries contributed to the short bubble on Sterling that forced the UK out of the ERM, not unlike the subprime losses last year and this spring led to an excess of capital in the oil futures market and the subsequent market distortions. Basically, I'm worried about whether the risks as well as the potential benefits would be magnified in an economy the size of the US and furthermore as the world's major reserve currency.

By the way, you might find Neal Stephenson's 'Cryptonomicon' worth a read. His writing is a bit overwrought for my taste, but I've got a small intellectual side bet on strong crypto as the basis for an alternative reserve currency.

[Citizen Number 9]

13. No way.

Once the banks are nationalized you have bureaucrats controlling quantities of stock that they have no business and precious few qualifications to affect.

Best thing to do is limit the size of companies. That's the way to spread the wealth and the control around.

We should not allow any company to get "too big to fail" again.

[The_Commonist]

5. I agree.

I know a number of people who I believe are irrationally opposed to anything with the word "social" in it.
Personally, I don't see any other way out of this. Of course, there are those who would rather see the entire planet laid waste than have their ideology proven wrong.

We can even sell those nationalized entities back to whomever wants to buy them once things are stabilized.

[bhikkhu]

15. Nationalization of natural resources should be a no-brainer

speaking of oil in particular, Norway is a very good example of its benefits. While their reserve was minuscule compared to ours prior to being put into production, we may both begin to run dry around the same time. But we will have nothing to show for it, while they will have a substantial national trust fund set up to cushion the transition.