Should Banks, Too Big to Fail, Be Nationalized?

Do Collapsed Financial Institutions Jeopardize National Security?

Feb 26, 2009

All forms of financial institutions have dominated the US economy the last 8 months. Should free market capitalism continue or Federal interactions dominate businesses?

Banks, insurance companies and automobile finance corporations along with investment companies and brokerage houses have dominated the US economic news with trillion dollar losses since June 2008. Today; however, the argument is not about the amount of money lost or the institutional need for government money or even how much money is needed; but who should control that wealth. Spurred by Wall Street, arguments about Credit Default Swaps, sub-prime mortgage lending, unregulated financial markets and credit rating agencies’ conflict of interests have become backbench issues to the fundamental principles of market place capitalism verses governmental nationalization.

The Problem

Free-wheeling economic principles over the last 16 years have created economic crises and a melt down of the banking system. Economic fundamentalist Republicans, aided by sycophantic Democrats, ideological regulators, greedy bankers and unscrupulous CEOs opened the doors of this Pandora’s Box. The 2008 Economics Nobel Laureate, Dr. Paul Krugman, said on Sunday (2/22/09’s) This Week with George Stephanopoulos, “Oh there are many, many culprits…Alan Greenspan if there is a single biggest villain.”

The 2001 Nobel Prize-winning economists, Dr. Joseph Stiglitz alleged in a September 17th 2008 CNN commentary, “There is ample blame to be shared…. the Fed failed twice, both as a regulator and in the conduct of monetary policy….Why did the Fed fail?...key regulators like Alan Greenspan didn't really believe in regulation; when the excesses of the financial system were noted, they called for self-regulation -- an oxymoron.”

Capitalism

Historical failures, along with recent collapses, demonstrate that economic capitalism as a national system, demands a balance between free markets and governmental regulations. Professor Stiglitz continued, “…at the center of blame must be the financial institutions. They, and even more their executives, had incentives that were not well aligned with the needs of our economy and our society.”

Self regulation of multinational banks is an unnatural concept according to Dr. Stiglitz. Furthermore, NYU economics professor, Dr. Nouriel Roubini, held on CNBC’s February 24th program, the problem is “…furious banking consolidation that took place in the years preceding the crisis made matters worse, as it had created banks that were too big to fail but also too big to save.”

Nationalization

If banks are “too big to fail” then nationalization seems a logical answer. But, nationalization implies socialism, so said Pulitzer Prize winning conservative columnist George Will on This Week. “Nationalization usually means to people socialism. Socialism usually means public ownership of the commanding heights of the economy….”

For those fearing socialism, the fundamental question becomes, who will loose if banks are nationalized? On one side of the argument is little old ladies and pension funds opposed by fat cats and foreign governments who did no “due diligence” when investing.

A missing fact is 39 banks, since 1/1/08, had stakeholder’ equity wiped out and are currently owned (nationalized) by the government.* Presently the “too big” banks want taxpayers to protect bond and shareholders. In Peter Coy’s Business Week article of 24 February, he quotes Donn Vickrey, co-founder of Gradient Analytics, “The bond and equity holders should lose first before the taxpayers do. They made the choice to invest…."

National Security

Arguments over liability for the banks are diverse; but, whatever view is held, Americans can not ignore national security issues. National Intelligence Director Dennis Blair is quoted in a Feburary 12th Huffington Post article, “…the most pressing immediate threat to the United States [is] the economic crisis.”

With CitiGroup, AIG, Bank of America and other large banks in crises mode; the US must place security above all other arguments. Senate Banking Committee Chairman Chris Dodd said in a January 11th AP interview that banks seeking foreign investment must not “…compromise our national security or pose a threat to our economic stability."

How can America guard against these threats with insolvent “zombie financial institutions,” as Dr. Roubini supposed?

The copyright of the article Should Banks, Too Big to Fail, Be Nationalized? in American Affairs is owned by Frank W. Hardy. Permission to republish Should Banks, Too Big to Fail, Be Nationalized? in print or online must be granted by the author in writing.