The People's Bank? [Cliff May]
THE CORNER
Headline from today's Washington Post:
U.S. Forces Nine Major Banks To Accept Partial Nationalization
The U.S. government is dramatically escalating its response to the financial crisis by planning to invest $250 billion in the country's banks, forcing nine of the largest to accept a Treasury stake in what amounts to a partial nationalization.
If you were of a socialist bent, and you were the next President of the United States, a nationalized banking system would be a pretty nice gift for a Republican administration to bestow upon you, one you would probably not want to give up soon or easily.
I'm just saying ...
Re: The People's Bank [Andrew Stuttaford]
Cliff, while (as I've said before) I reckon that a direct equity investment in the banks by the government was the right thing to do, although I'm as yet unconvinced that forcing, more or less, banks to accept this ownership was the way to go. You are, of course, quite right to warn of the temptation that this may offer to politicians — and not only "socialist" politicians. This move is (unfortunately) a necessary fix, but it must be a temporary fix. Making sure that this is indeed the case is likely to be one of the major political battles in the years to come — and it will be an uphill struggle.
Re: The People's Bank [Iain Murray]
Of course, many economists, as far as I could make out, argued like Andrew (if I recall correctly) that the recapitalization was a preferable alternative to the Paulson bailout plan. So, now he's conceded that, he should send the extra $450 billlion back to Congress rather than keeping it to create further mischief. On the upside, the high (and scheduled to get higher) coupon price should also help ensure the temporary nature of the investment — banks will want to get short of it very quickly. We should, however, remember that the George Soros version of the recapitalization plan wanted a much lower coupon to stimulate lending. I'm not sure what leeway a future Treasury secretary will have to change these terms, but that prospect should be worrisome.
On the other hand, we should also remember that this act thwarts creative destruction. One thing we saw yesterday was that banks who were not exposed to the subprime risks were the big winners. These should be the banks we turn to in the future by virtue of their success at avoiding the risks. What this plan does is keep the current players and institutions in the game to these banks' detriment. That is a big downside. |
