Yesterday, after Tim Geithner’s lackluster speech, President Obama told ABC that ‘nationalization’ of the banks “wouldn’t make sense.” He specifically referenced the Swedish model. And he offered two basic reasons: 1) We’ve got thousands of banks whereas the Swedes had only a handful. And 2) We have different political ‘traditions’ that don’t make it credible in this country, which I take to mean that anti-statism is too deep in the American political fabric for it to be workable.
The second point speaks for itself whether you agree with it or not. But it’s the first that caught my attention. It’s true that we have many more banks than the Swedes had. In addition to the couple dozen well known national banks (perhaps fewer actually), there are thousands of small to medium sized banks spread around the country.
As Obama put it, “Here’s the problem — Sweden had like five banks. We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the, the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense.”
What doesn’t compute to me about this is that I do not think anyone is talking about a wholesale nationalization of the banking sector — as in you literally nationalize the whole banking industry. The problem seems to be centered in a very small number of very big mega-banks. And what people are talking about is applying some version of Geithner’s bank ‘stress test’, coming clean about which banks are insolvent and having those banks that don’t pass the test taken over, just as little banks go under every week nowadays. (For a more detailed discussion of how this would all work, see our recent interview with economist Joe Stiglitz.)
Late Update: Simon Johnson makes another troubling point. The folks at the Treasury just don’t have a lot of experience dealing with all out financial crises. And the folks who do don’t seem to think we’re going down the right path.