100th Time on Nationalization

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February 25, 2009 10:41 a.m.
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There have been a lot of articles over the last 48 hours arguing that the biggest banks are simply too complex and multifaceted to be taken over and run for any period of time by the relevant government agencies. It does not seem prohibitive to me. But just how the government would run Citibank in the short to medium term is a good question to start pondering. But there’s a politico-economic argument for nationalization that Paul Krugman (and Noam Scheiber) references in a post he just did on his blog.

Namely, you’re just not going to get another big bailout bill through Congress as long as it leaves the present crew (management and shareholders) in place, since it will be (rightly) seen as another taxpayer giveaway to the investors and executives who caused the problem in the first place. So even if you could hypothetically stabilize the banks with a massive taxpayer ripoff, the money probably isn’t there. In other words, the intersection of the economics and the politics seals the deal.

As Krugman puts it

As long as capital injections are seen as a way to bail out the people who got us into this mess (which they are as long as the banks haven’t been put into receivership), the political system won’t, repeat, won’t be willing to come up with enough money to make the system healthy again. At most we’ll get a slow intravenous drip that’s enough to keep the banks shambling along.

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