Sunday, March 8, 2009
An Amazingly Disingenuous Piece by Alan Blinder on Bank Nationalization
Before I start shredding "Nationalize? Hey, Not So Fast," by Alan Blinder in the New York Times, let us first go back to the basic problem,, nomenclature. Blinder does not specifically do so in this article, but opponents to nationalization often raise the image of enterprises being expropriated by the state, in other words, healthy (or at least viable) businesses being stolen.
We have the reverse here. Instead a transfer of wealth from the private sector to the state, we have the state (as in the taxpayer) propping up businesses and keeping management demonstrated to be incompetent, perhaps corrupt (let us not forget that overcompensation in phony good times is tantamount to looting, and liberal accounting appears to be awfully common) in place.
The normal remedy for failed businesses is to let them fail. But we don't do that with banks. The big fear is depositor runs, and if that were to occur on any scale, it would indeed bring the entire system down.
Quite a few readers have said something along the lines of: "I'm opposed to nationalization, the banks should be put into receivership." Hate to tell you, they are the same thing.
When a bank fails (technically, the relevant regulators, often state level, deem it to be insolvent, and the FDIC rides in) the FDIC does "own" it. The assets and liabilities are in the hands of the FDIC, it determines how to dispose of them. However, its preference is to seize the bank on a Friday and have the deposits and branches in new hands by Monday. The fact of FDIC ownership is thus not apparent to the public. However, when Continental Illinois failed in 1984, it took nearly a decade for it to be sold (I forget the details, but if my recollection is correct, a reader said it was a real garbage barge).
The other big, BIG, problem is terrible incentives. Management has nothing to lose by taking risks, and to get out from under the governments' intense oversight and pay caps, its reason to take aggressive risks as great, if not greater, than before. And now there are no shareholders to take the first hit, say by dividend cuts (with stock prices trading at option like levels, anyone who still holds the shares of the big banks is either a punter, not an investor, or very asleep at the switch), and pay and staffing levels already under pressure, the downside of any miscues comes out of the taxpayers' hide.
....more.......
http://www.nakedcapitalism.com/2009/03/amazingly-disingenuous-piece-by-alan.html