To nationalise or not to nationalise?
The UK government has shown its hand. TARP II is underway in the US.
If the latest gamut of policy responses don’t work – and there’s plenty who say they won’t – then nationalisation of banks is very much the only option left.
With that in mind, FT Alphaville has rounded up a selection of the pro-nationalisation views currently on offer .
Kicking things off is Paul Krugman, who says nationalisation is preferable to a zombie banking collapse:
…many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking… Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal – and that we’re about to get another financial rescue plan that fails to do the job.
Exactly what Krugman means when he refers to voodoo accounting at the banks is fleshed out by analysts at RBS – according to whom, the UK’s banks are “technically insolvent”. (via The Independent, via Naked Capitalism):
Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that “the domestic UK banks are technically insolvent on a fully marked-to-market basis”.
The warning does not mean British banks are about to go bust, because the assessment is purely theoretical, and RBS said the position was “not unusual at this stage in the economic cycle”.
Technical insolvency is not necessarily grounds for nationalisation and as the analysts note, is not wholly unusual in a downturn. Then again, we nationalised Northern Rock. Edmund Conway, the Telegraph’s economics editor says there’s little difference in some sense between the Rock and RBS:
Pragmatically speaking, there is little to separate RBS and Northern Rock in terms of their asset books or control structures, nor indeed their absolute reliance on the Government for support. Should the stream of losses continue at even a fraction of this rate, the company looks a banker to return to the Government for further capital injections and, ultimately, nationalisation.
Looking at the picture more broadly, the LSE’s Willem Buiter argues that bailouts simply don’t work : in fact, they actually incentivise banks to stop lending:
But I believe that costly partial state ownership and the fear of future state ownership (partial or complete) are themselves discouraging banks from lending… If a bank has no option but to take the government’s money, it will try to repay it as soon as possible – to get the government out of its hair. Such a bank will therefore be reluctant to take any risk, including the risk of lending to the non-financial private sector. Such a bank will hoard liquidity (sometimes in the form of deposits/reserves with the central bank) to regain its independence from the government. Still independent banks will hoard liquidity to stay out of the clutches of the government.
And Hans-Werner Sinn, Ifo president provides some concrete German examples to back-up Buiter’s points:
Faced with the choice of reducing business or seeking to return to previous volumes by accepting government equity, bank executives will opt for the first alternative in order to avoid cutting their own salaries.
With such arguments against bailouts in mind, nationalisation is probably, then, the lesser of two evils, Felix Salmon suggests over at Portfolio.com:
Given how messy all of these alternatives are, why not simply go down the nationalization route? It’s transparent and easy to understand: if a bank is insolvent (and the FDIC is good at making those determinations), then simply nationalize it. That’s what the Swedes did, and that’s what we should do too.
Steve Waldman at interfluidity fleshes out the Swedish model: which involved nationalising the two nations largest troubled banks and then, reprivatising them later:
The state took full ownership and control over Nordbanken in 1992, actively cleaned it up, and eventually reprivatized it. During the crisis, Nordbanken purchased Gota, effectively nationalizing the smaller bank. It is true that only these two banks were nationalized, and a Swedish government description of the crisis is careful to note that, as a matter of policy “the state would not endeavour to become an owner of banks or other institutions.” But Nordbanken alone had an asset base of 23% of GDP. To put that in perspective, in US terms that’s almost as large as Citi and Bank of America.
And for a more first-hand exposition of the Swedish experience of bank nationalisation, it’s worth consulting this 1997 Jackson Hole speech by Urban Bäckström, former governor of the Swedish central banks. The crucial thing seems to be that banks were forced to present a full account of expected losses and writedowns:
This clarifies the extent of the problems and the support that is required. Provided the authorities and the banks make it credible that no additional problems have been concealed, this procedure also promotes confidence.
Joshua Rosner of Graham Fischer says that like Sweden, the best bet for the US (and the UK) would then too be for banks to be forced to writedown all their suspect assets and then have equity bought by the government. Writedowns and then nationalisation.
Faced with a similar crisis in the 1990s, Sweden forced banks to write down bad loans, then the government injected liquidity into the system and profited from the upside after taking equity stakes in the banks.
Interesting that Brown is calling for banks to “come clean” then.
Which brings us perhaps to the current UK situation. And whether, as says the Economist we’re on a course of “creeping nationalisation” anyway :
Despite repeated government claims it is not interested in running banks, creeping nationalisation may be on the way:
There is little in the new package to give banks the incentive to put their profit motive aside and help to reflate the economy. RBS and Lloyds have some private shareholders who could sue if they suspected their interests were being abused… Unhappily, the government’s new measures do not dispel the uncertainty that continues to weigh on banks’ balance sheets.
The government … has chosen a slow and complex route.
A “slow and complex route” that the Economist’s Free Exchange blog is meanwhile, quite explictly no fan of:
Time to quit mucking around and make with the nationalisations.
Finally, if it’s coming, then make sure it’s done properly says John Hempton at Bronte Capital in his blog post Nationalisation after due process:
What I want is extreme government action (nationalisation) but with a process to ensure that existing property rights are honoured. I want the benefits of nationalisation (that it works) without the costs (that it is seen to be arbitrary to capital providers).
Update: For further reference, FT.com now has a very interesting video of PE chief Guy Hands’ thoughts on nationalisation and Phillip Stephens’ op-ed (“Shoot the bankers, nationalise the banks”) is an excellent read:
Dissembling, I have concluded, is hard-wired into the banks’ DNA.