Wednesday, February 18, 2009

Greenspan Capitulates

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”
- Alan Greenspan, Financial Times

This must be a very difficult retirement for the former Fed chief.

7 comments:

JayCross said...

Brutal.

Michael Prescott said...

This may be the best approach. It's what Sweden did in similar circumstances, and it seems to have worked. The alternative is to prop up insolvent banks for years, creating a continuing crisis of confidence. That's the approach Japan took in keeping alive their so-called "zombie banks"; the result was the "lost decade" of economic stagnation.

RottedOak said...

Increasing numbers of economic commentators have been pointing out that a lot depends on what "nationalization" means. If it means the government running the banks long-term, I believe most economists, probably Greenspan included, would consider that a bad idea. If it means the government taking over temporarily to reorganize the banks' assets before putting them back in private control, then that's similar to what already happens in a bankruptcy. That ought to be acceptable to people from most political persuasions (excepting a few hardcore types such as communists who think banking should be permanently nationalized, or anarchists who don't believe in any government action).

Jay said...

"There's no such thing as a temporary suicide."

Seems like an apt quote in light of "temporary" nationalization. What dose the government ever do that is truly "temporary?" I think it was Neil Cavuto who noted that the New Deal is still the deal today.

Others have written about the "fish hook" nature of government programs/intervention - easy to bring in, painful to take out.

Wells said...

I mean, the losses have already been socialized. Perhaps the institutions can also be socialized, and bankers be paid on a GS scale, like every other government employee. It would help the banks move to some semblence of profitability. Government employee wages would also be more than most bankers would get if the market was completely free (And the banks were allowed to fail)

It sounds like a win/win to me.

gregnyquist said...

Jay: "What dose the government ever do that is truly 'temporary?' I think it was Neil Cavuto who noted that the New Deal is still the deal today."

That's hardly true at all. Many New Deal programs were declared unconstitutional shortly after they were passed—which is why Roosevelt tried to pack the supreme court in the late thirties. And many of the measures that survived the court were rescinded after '39. Those New Deal measures that were thought to impinge on the war effort were removed in the early forties, and much of the rest by the Republican congress in the late forties. In the 70s and 80s much of remaining regulatory legacy of the New Deal was dismantled and cut back, so that very little beyond Social Security and Federal deposit insurance was left of it. Johnson's Great Society has left a greater legacy—but even the GS was scaled back by the welfare reform of the 90s.

Niall Ferguson has made some good points in regard to this controversy over nationalization: "The solution to the debt crisis is not more debt but less debt. Two things must happen. First, banks that are de facto insolvent need to be restructured—a word that is preferable to the old-fashioned 'nationalization.' Existing shareholders will have face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalization after losses have meaningfully been written down....There are precedents for such drastic action, notably the response to the Swedish banking crisis of the early 1990s. The critical point is to avoid the nightmare of a state-dominated financial sector. The last thing America needs is to have all its banks run like Amtrak or, worse, the Internal Revenue Service. State life-support for moribund dinosaur banks is an expedient designed to avert the disaster of a generalized banking extinction, not a belated victory for socialism in North America. It should not and must not impede the formation of new banks by the private sector. Financial history is, after all, an evolutionary process. When old banks die, new banks swiftly take their place. It is therefore vital that state control does not give the old banks an unfair advantage. So recapitalization must be a once-only event, with no enduring government guarantees or subsidies. And there should be a clear timetable for 're-privatization' within, say, ten years."

Whether this is the best solution to our difficulties I can't say for sure, but it's certainly preferable to the trillion dollar, debt-ridden stimulus plan, which is simply a desperate attempt to allow us to continue in our dysfunctional expand-through-debt ways, using the government as a new source of debt so we can go on as if nothing ever happened. The only way to go forward is to change our bad old ways and face up to the massive amount of toxic debt that the credit bubble has accumulated (perhaps as much as $2 trillion).

Libertarians and Objectivists are going to have to face up to the fact that doing nothing is not a politically viable option. But they can rejoice in the fact that the long-term prospects of the mammoth welfare state are not good. There exist over 60 trillion dollars in medicare and social security liabilities over the next several decades, much of which can never be paid. So one way or another, we will see big changes in the coming years. The only question is how much social and political strife is going to be generated by this painful transition we're facing.

JayCross said...

Greg,

Libertarians and Objectivists are going to have to face up to the fact that doing nothing is not a politically viable option.

Correct. We are only arguing that it is the correct option. Sadly, what is correct and what is politically viable are often different.