Out of Control Policy Blog

The nationalization road ahead

The U.S. may well be headed into one of the darkest periods of economic policy since the Great Depression. President Bush opened and walked through the doors of nationalization when he agreed to and authorized the federal government's forced investment in major financial services firms. Now, with a fresh legion of "progressive" reformers populating the economic policy ranks, President Obama is poised to complete the process. Notes the New York Times:

In an interview Sunday on "This Week" on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.

"Well, whatever you want to call it," said Ms. Pelosi, Democrat of California. "If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

"I'm not talking about total ownership," she quickly cautioned – stopping herself by posing a question: "Would we have ever thought we would see the day when we'd be using that terminology? 'Nationalization of the banks?' "

The problem with partial privatizations, of course, is they don't go far enough. If the federal government is going to have an equity stake in private businesses, they should have a large enough ownership share to throw out the old managers, dictate executive compensation, and make other key business decisions.

That [de facto nationalization] has already happened; taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent. But the government's influence is far larger than those numbers suggest, because it has guaranteed to absorb the losses of some of the two banks' most toxic assets, a figure that could run into the hundreds of billions of dollars.

Many believe this form of hybrid ownership – part government, part private, with the responsibilities of ownership unclear – will not prove workable.

"The case for full nationalization is far stronger now than it was a few months ago," said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. "If you don't own the majority, you don't get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It's the mistake the Japanese made in the '90s."

"I would guess that sometime in the next few weeks, President Obama and Tim Geithner," he said, referring to the nominee for Treasury secretary, "will have to come out and say, 'It's much worse than we thought,' and just bite the bullet."

Samuel Staley is Research Fellow


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