UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who has covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

February 3, 2009

NATIONALIZING BANKS

Nationalization is a radical move, but there are real and practical problems with trying to prop up falling banks that are fundamentally unsound. So far, several broad approaches have been bandied about in D.C. All have similar flaws, and all represent an elaborate dance around the N-word.

The first is to buy up the banks' toxic assets -- the original concept behind the TARP. The government would fund the creation of a "bad bank" to hold onto those assets in the hope that they would increase in value down the road and maybe return some cash to the taxpayers. The argument is that the government can buy and hold that junk with money the private sector can't raise, and also pays less for the cash in the first place.

But there's a big problem with the idea of creating a "bad bank." Asset prices are so low right now that either the government overpays for them, providing a huge subsidy to shareholders in companies that are on the shakiest of ground, or it pays a fair value for those assets, in which case banks holding large amounts of debt-based securities would have little incentive to participate. If they did, they'd go belly-up anyway (if they could simply sell off their crappy paper at current prices -- however one determines what those prices are in a market that's essentially shut down -- we wouldn't be in this mess).

Another proposal -- one that has gained currency since the first round of TARP money was dished out -- is to "recapitalize the banks" by buying stock in the firms. The government would basically become an investor, and assuming that the institutions in question rebounded, it could later sell its shares and recoup some or all of the dollars taxpayers threw at them.

Here, there's a similar problem. The value of bank stocks are at rock bottom, and there's a reason for that: they represent a terrible investment, and that would effectively make the U.S. taxpayer the sucker of last resort -- a chump who would buy into a failing institution.


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