A Stress Test for the Latest Bailout Plan, by Joe Nocera, who "still can’t help thinking that Mr. Geithner is avoiding the most straightforward, obvious path out of the crisis."
But nationalization isn't in the cards, because . . .
“When I talk to experts, after about two minutes they say, ‘we should just nationalize,’ ” said Simon Johnson, a banking expert (and blogger) at the Sloan School of Business at M.I.T. “That tells me that the consensus is moving in this direction, and we are all just afraid to say it.” Nationalization. I just said it. The roof didn’t cave in.
Mr. Geithner simply doesn’t seem able to get his head around the idea of nationalizing a big bank. As he told the New York Times columnist David Brooks recently, “It’s very important that we don’t look like there’s any intent of taking over or managing banks. Governments are terrible managers of bad assets. There’s no good history of governments doing that well.”In my view, nationalization is certainly preferable to any alternative Geithner is likely to come up with, and I predict that, sooner or later, the banks will in fact be nationalized. I also predict, by the way, that Geithner will be resigning soon, possibly very soon. But the process by which nationalization will take place will be the wrong one -- and it will fail. The sensible way to nationalize the banks (and all other institutions "too big to fail") is to first allow them to fail and then take them over -- at little or no cost to the government (i.e., the people -- I hate that word "taxpayers"). Unfortunately, however, our politicians are still bemused by the fatal notion that somehow these banks can be "saved," whatever that means, so, in the process of nationalizing them, they will simultaneously be pouring money into them -- not as an investment, as in spending money to hire new staff or modernize the technology, but in the vain hope that somehow the mountain of "toxic debt" held by these banks can be exorcised.
But that’s a canard. The government did a terrific job managing banks during the savings and loan crisis of the 1980s. It took over banks — “we called them bridge banks,” recalled William Seidman, the former chairman of the Federal Deposit Insurance Corporation, with a chuckle — replaced their top managers and directors, stripped out bad assets that the government then managed brilliantly, and sold the newly healthy banks to private buyers. It turned out not to be all that hard to find actual bankers who could run these S.& L.’s for the federal government.
It can't. And for that reason, nationalization won't really solve the problem either. The only way to deal with the toxic assets is to let the banks fail first, which will reduce their investors, their creditors -- and their toxic assets -- to zero (Goose Egg, remember?), where they rightfully belong, since the investments in question are clearly worthless. But the "assets" (actually liabilities) are so huge that their failure would be tantamount to the failure of the entire US -- and world -- financial system. And that cannot be allowed to happen. Except that there is no way to prevent it from happening. So everything that will be done after nationalization will be purely in the realm of magical thinking. Very expensive magical thinking, because the only way to maintain the illusion that these obligations can be redeemed is to print money -- trillions of dollars of it.
There will never be enough. Not only will our economy follow the financial institutions themselves into bankruptcy, but our profligate printing of money will eventually make money itself worthless. This development will be far beyond mere inflation, or even hyperinflation. It will take us to the point that money will cease to have any meaning whatsoever. One could call this the "Black Hole" theory of economics, which would make it especially attractive to science fiction fans. Only it won't be fiction. It will be real.
This will be the oft-mentioned, but never explained, "unacceptable alternative" we've been hearing so much about, the total and complete disaster everyone in government is determined to avoid at all costs. But, as I explained in an earlier post, such a disaster, while it cannot be avoided, can most certainly be lived with. It's not like the aftermath of a war, where factories, transportation, communication, power, agriculture, even the social fabric itself, may have been totally destroyed. What will have been destroyed is the monetary system, i.e., money -- and the financial system that depends on it. And if its destruction is handled sensitively and intelligently, then the collateral damage to society per se can be minimized. If the process is badly handled, then the collateral damage could prove disastrous -- and that would be a shame, because such a dire outcome is not necessary.