The problem with nationalisation

The chorus for nationalising America's struggling banks is growing louder. There are no good options and certainly nothing resembling a free-market solution, says Gerald O'Driscoll Jr., a senior fellow at the Cato Institute.

Ideally, the administration would adopt the least-cost method for the taxpayer of resolving the failure of a large bank. In principle, temporary nationalisation in some instances could be the least-cost approach. The example of the Swedish banking crisis of the early 1990s is most often cited by nationalisation advocates, says O'Driscoll:

The conservative government of Prime Minister Carl Bildt took an aggressive approach to the banking crisis and is generally credited with having done a good job of resolving it.

He acted quickly to guarantee all depositors and bank creditors.

Asset values were aggressively written down.

Public funds were used to recapitalise banks, for which the government received common shares to give any upside to the taxpayer.

Two banks were nationalised entirely.

The rest of the story is an important element of Bildt's success, says O'Driscoll. His political opposition backed his government, at least in public. The bad assets, mostly real estate, were sold relatively quickly. The needed workouts brought cries that borrowers were being squeezed. In short, the resolution was handled professionally rather than politically.

The contrast with the current U.S. crisis could not be sharper, says O'Driscoll:

From the beginning, the handling of the U.S. crisis has been politicised.

The partisanship is as toxic as the bad assets on bank balance sheets.

Both parties are coming up with schemes to impede the process of foreclosing on homeowners who can't afford their homes, which would get those homes into the hands of new owners who can afford them.

Does anyone believe that a government bad bank will squeeze homeowners? To ask the question is to answer it, says O'Driscoll.

Source: Gerald O'Driscoll Jr., The Problem With Nationalization; Unlike Sweden, Congress would quickly politicize seized bank assets, Wall Street Journal, February 23, 2009.

For text: http://online.wsj.com/article/SB123535183265845013.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 03 March 2009