Bank Nationalization

In a post entitled "Mitch McConnell Gets It Right", Erick Erickson at RedState quotes Sen. McConnell:

I think nationalizing the banks is an absolutely wrong thing to do.

Erickson then comments:

Citibank does not need nationalization. It needs bankruptcy. Just because it has a bunch of foreign investors does not mean it should get out of the process a lesser entity would go through.

Can anyone tell me the point of this line of argument? I have no doubt that both Erickson and McConnell understand that nationalization or receivership is bankruptcy for banks. When he calls for Citibank to receive the same treatment a lesser entity would receive, is Erickson not calling for Citibank to be treated like IndyMac? And yet with the next breath he rules out the very process with which IndyMac was treated: nationalization.

By posing the false choice between bankruptcy and nationalization McConnell and Erickson effectively give Schumer, Geithner and Obama cover to service Democrat big donors at the expense of the taxpayer. How does this position benefit taxpayers, conservatives or the GOP?

Why are we throwing away the single best opportunity to demonstrate fiscal responsibility, financial credibility, political courage and most importantly relevance? All the while pushing the hands-down consensus best policy.

I'm really at a loss on this. What a coup it would be for the GOP to have economists from the right of Martin Feldstein all the way to Paul Krugman lining up to praise our leadership on this! But it's not going to happen.

Erickson and McConnell understand that IndyMac was nationalized. They understand it is very likely that Citibank is insolvent. Why then do they demure from leading on this?

If we are passing on this golden opportunity merely from fear of the term "nationalization" then we have lost faith in our ability to manage our message effectively. Let's call it pre-privatization, let's call it receivership, hell, let's call it bankruptcy. But whatever we do, let's call for it before the opportunity is lost.

By coddling their Wall Street friends and benefactors the Obama Administration is engaging in a form of crony capitalism. The GOP can do the country, the economy and themselves a service by bringing political pressure to bear by vigorously supporting calls for bank nationalization.

As a follow up to my initial post recommending the GOP embrace bank nationalization, let me draw your attention a post by Greg Mankiw former head of the Council of Economic Advisors under President Bush and a professor of economics at Harvard. Mankiw provides a useful corrective to the initial shock of the term "bank nationalization" by spelling out what it would actually mean and how it can relatively painlessly provide a solution to the banking/credit piece of the economic crisis. He begins by discussing why the idea puts people off.

Why are people scared about the idea of nationalization? One reason is that it is a sign of the depth of our problems. A second, more substantive reason is that it seems to point in a bad direction. I certainly do not want the government deciding who deserves credit and who does not, what kind of investments are worthy of financing and what kind are not. That is a big step toward crony capitalism, where the politically connected get the goodies, and economic stagnation awaits the rest of us.

Let me interject here that Geithner and Obama are themselves engaged in a form of crony capitalism because they are working hard to protect the claims of their insolvent Wall Street supporters. Mankiw continues:

If the government is to intervene in a big way to fix the banking system, "nationalization" is the wrong word because it suggests the wrong endgame...the goal should be a massive reorganization of these financial institutions. Some might call it nationalization, but more accurately it would be a type of bankruptcy procedure.

Bankruptcy could become, in effect, a massive bank recapitalization. Essentially, the equity holders are told, "Go away, you have been zeroed out." The debt holders are told, "Congratulations, you are the new equity holders." Suddenly, these financial organizations have a lot more equity capital and not a shred of debt! And all done without a penny of taxpayer money!

By declining to perform their regulatory mandate, the Fed and other regulators are allowing insolvent banks to pretend they are solvent at the cost of paralysing the crucial financial intermediation services the banking sector provides to the larger economy. That effectively means the government is trying to pick the winners in this fight which is both a very bad idea and a form of crony capitalism.

As I suggested in my original post on nationalization, this presents the GOP with a rare opportunity where the minority party can differentiate itself by saying yes and championing the right policy rather than always being in the position of having to say no to the majority's initiatives. The Democrats lack the political will to do what they know is the correct policy. The GOP can demonstrate seriousness, leadership and gravitas by pushing the majority to do what everyone knows is the right thing.