What is Nationalization and why is Everyone Afraid of It?

What's in a word? Doesn't a rose by any other name smell as sweet?

But the boogie man du jour is nationalization.

What do they mean exactly? The definition of nationalization is:

Takeover of privately owned corporations, industries, and resources by a government with or without compensation.

Ok, so what's the difference between this and the fact the U.S. taxpayer has given the financial sector $800 billion dollars?

There is little difference says George Will.

The issue is what the U.S. taxpayer gets in return.

zombie
Another term buzzing around that we need to define is Zombie bank. A Zombie bank is much more than a bank with negative equity, in other words insolvent. A Zombie bank by it's existence sucks the life blood out of other financial institutions, the taxpayer's pocket and the entire economy in order to live. In other words, the walking dead who eat live flesh. The leg these banks are chewing on...is the U.S. economy.

So when economists categorize banks and other businesses as zombies, they are not merely referring to them as dead, but pointing out in keeping these banks artificially alive we continue to destroy every other healthy financial institution around them.

Currently Citigroup is in negotiations for increased government ownership via conversion to common shares. But this still leaves the shareholders intact and Citigroup continues to be a Zombie bank.

Paul Krugman is also trying to push for economic sanity. In this opinion piece Krugman is stating the obvious, banks like Citigroup and Bank of America are worth much less than the money the U.S. taxpayer is pouring in to keep them alive.

Let's be concrete here. There's a reasonable chance - not a certainty - that Citi and BofA, together, will lose hundreds of billions over the next few years. And their capital, the excess of their assets over their liabilities, isn't remotely large enough to cover those potential losses.

Arguably, the only reason they haven't already failed is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they're zombie banks, unable to supply the credit the economy needs.

To end their zombiehood the banks need more capital. But they can't raise more capital from private investors. So the government has to supply the necessary funds.

But here's the thing: The funds needed to bring these banks fully back to life would greatly exceed what they're currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it's basically putting up all the money, the government should get ownership in return.

Still, isn't nationalization un-American? No, it's as American as apple pie.

So, don't get hung up on word nationalization. The key here is to keep the American taxpayer screw job to the minimal damage possible.

Why is Wall Street reacting so badly to nationalization? Well, the stock holders will lose on their investments but obviously the nation and the U.S. taxpayer will gain. In other words nationalization will stop the financial zombie feed off of your tax dollars and so of course the zombie economy is very upset at being cut off from their food source!

Dollars & Sense has a good overview on the details of the current TARP, how specifically it is sucking the blood out of the U.S. taxpayer as well as the economy and what major economists are now recommending:

The Treasury Department’s recent bailouts of major U.S. banks will result in a massive transfer of income from taxpayers to those banks’ bondholders.

Under the government’s current bailout plan, the total sum of money transferred from taxpayers to bondholders will probably be at least several hundred billion dollars and could be as much as $1 trillion, which is about $3,300 for each man, woman, and child in the United States. These bondholders took risks and made lots of money during the recent boom, but now taxpayers are being forced to bail them out and pay for their losses.

This trillion-dollar transfer of income from taxpayers to bondholders is an economic injustice that should be stopped immediately, and it can be stopped—if the government fully and permanently nationalizes the banks that are “too big to fail.”

The TARP program (“Troubled Assets Recovery Program”) has gone through several incarnations. It was originally intended to purchase high-risk mortgage-backed securities from banks. But this plan floundered because it is very difficult in the current circumstances to determine the value of these risky assets, and thus the price the government should pay for them. The main policy for the first $350 billion spent so far has been to invest government capital into banks by buying preferred stock (which is the equivalent of a loan), which receives a 5% rate of return (Warren Buffet gets a 10% rate of return when he buys preferred stocks these days) and has no voting rights. Managers of the banks are not being replaced, and there are usually cosmetic limits on executive pay, unlikely to be enforced. So these bank managers, who are largely responsible for the banking crisis, will continue to be rewarded with salaries of millions of dollars per year, paid for in part with taxpayer money. Existing bank stock loses value as the bank issues stock secured by TARP funds.

But the main beneficiaries of the government bailout money are the bondholders of the banks (see sidebar, “Bank Bonds,”). In the event of future losses, which are likely to be enormous, the government bailout money will be used directly or indirectly to pay off the bondholders. This could eventually take all of the available TARP money, and perhaps even more. So the government bailout of the banks is ultimately a bailout of the banks’ bondholders, paid for by taxpayers.

In a little history of financial crises, it was shown Sweden was the nation which quickly nationalized the banks and is also the nation which suffered the least consequence to their economy. In other words, their solution was the cheapest to the taxpayer.

So the plan goes like this: seize the banks, open the books, write off the toxic assets, shareholders take their loss, fire all of the executives, board and plain start over. This is not a permanent take over, it's more of the nation goes to the bank junk yard, throws out all of the non-working parts, cleans the bank up, kicks out the bums who created the mess and then sells the new shiny bank at auction, otherwise known as re-privatization.

Economist Roubini is making all of the talk show rounds calling for nationalization. The thing is, other experts are reaching this consensus.

George Stephanopoulos had a round table with Paul Krugman and Roubini.

So bear in mind you have already given up a lot of your money to save these financial institutions. Don't let a word scare you for the real terror is keeping these institutions alive with their self-feeding toxic assets, ponzi scheme models, eating the rest of the economy.

Meta: 

Comments

Both work for homogeneous religious populations

Well, 1500 years of Catholic Religious Orders kind of proves that Communism is viable- as a microeconomic method.

I have great doubts at the moment that ANYTHING is viable as a macroeconomic method- regulated capitalism included, since it seems far too easy for small minority groups of oligarchists to pool their money together to change the regulations.

But communism is not a viable macroeconomic method- too much centralization. Same problem with regulated capitalism, and just about any other system I can think of other than distributism- and the last isn't really a macroeconomic method at all, just a collection of protected microeconomies.
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Moral hazards would not exist in a system designed to eliminate fraud.

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Maximum jobs, not maximum profits.

Huh?

Communism can't exist in this interconnected world. (Now we are told that 35 different variants of capitalism exist.)
It would require isolated self-sufficiency to operate because theoretically it doesn't allow for or account for exchange rate mechanisms. Marx didn't address currency exchange rates much. Hence, convergence scenarios are likely more the case, and cooperativism will dominate given limited resources and growing populace. (Sorry for the lecture.:-)

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Tell that to the Benedictines

And the Trappists, and the Carmelites, and a dozen other Catholic orders who have made communism as a microeconomy work.

Personally, I think isolated self-sufficiency is a REALLY GOOD IDEA- a much better idea than relying on international trade for your needs. Ideally, every community should be self-sufficient first, and then trade out of surplus, and then it doesn't matter one whit if the local economy is cooperativistic or competitive.
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Moral hazards would not exist in a system designed to eliminate fraud.

You must have Javascript enabled to use this form.

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Maximum jobs, not maximum profits.