A Newsweek poll released over the weekend suggests that Americans may be more amendable than previously believed to the idea of a government takeover of major banks. The specific question posed by the survey asked was as follows:
Temporary nationalization is another way for the federal
government to deal with large banks in danger of failing.
This is where the government takes over a failing bank,
cleans its balance sheets, and then quickly sells it off.
In general, which do YOU think is the better way to deal
with failing banks... (READ)
29 Government financial aid WITHOUT any government
control of the bank, OR
56 Nationalization, where the government takes
11 Neither/Other (VOL.)
4 (DO NOT READ) Don’t know
As you can see, when the question is presented in this way, a majority of Americans prefer temporary nationalization to additional government bailouts. But let’s be clear about what the poll does and does not say.
First of all, the poll did not ask its respondents how comfortable they are with bank nationalization in the abstract. Instead, it asked how they feel about nationalization vis-à-vis bailouts. This is an important distinction. You might ask Americans whether they’d prefer to get a colonscopy or a root canal; if a majority said they’d prefer a colonscopy, that does not mean there’d be a line the next morning at the proctologist’s office.
Secondly, the poll’s wording is somewhat sympathetic toward the idea of nationalization; “cleans its balance sheets, and then quickly sells it off” sounds almost … easy … much easier than nationalization would be in practice.
Nevertheless, given that the poll did use the n-word (alternate phrasing such as ‘takeover’ polls much better), and that the n-word was preferred to bailouts by almost 2:1, I think this can be taken as a significant finding.
The key question, perhaps, is whether there is some sort of solution other than either nationalization or bailouts (or perhaps some combination thereof). Are these really the only two choices that we have?
I don’t want to render a categorical answer to that question, but the answer is probably ‘yes’. Although there are different flavors of nationalization, and different flavors of bailout, essentially all realistic solutions to the bailout crisis could be classified under one of those two headings. As Yves Smith compellingly explains, for instance, the ‘good bank’ / ‘bad bank’ solution probably requires nationalization first (and if it doesn’t require nationalization, it will probably require a ton of capital, above and beyond what is still available through TARP funds, which gets us back into the ‘bailout’ column).
How about just letting the banks fail, as Senator Richard Shelby, the Ranking Republican Member on the Senate banking committee suggested that we do? Bzzt. Banks don’t just disappear in this country when they become insolvent. Instead, the government steps in, protects the depositors up to the $250,000 FDIC limit, sells off what assets it can, and then gives the proceeds from those asset sales away in a particular order … depositors who were over the $250K limit get the rest of their money back first, then creditors do, then debtholders, then, finally, stockholders (see example here). The government, by the way, doesn’t wait for a bank to actually fail before doing this; it steps in almost literally in the dark of night (usually over a weekend) once such a failure appears inevitable or substantially likely. So ‘letting the banks fail’ is tantamount to nationalization anyway … albeit perhaps a more chaotic version of it.
Where I break from the liberal crowd, however, is in thinking that the Administration is avoiding nationalization because of a lack of political willpower, or some kind of phobia about being accused of socialism. On the contrary, as the Newsweek poll suggests (and as I think has also been evident for some time as a matter of common sense), nationalization is probably the path of least resistance insofar as the politics of everything goes. So why isn’t the Administration simply nationalizing Citi and BoA now?
Most likely because they’re buying time. They’re buying time to do any number of things:
a) ‘Stress test’ the banks to see just how bad the problems are and just which ones are candidates for nationalization;
b) Determine whether any alternatives to nationalization are still viable for the sick banks, perhaps involving existing TARP funds and “only” another hundred billion or two in taxpayer monies;
c) Figuring out how to nationalize the banks, if and when such a step is deemed to be necessary, and,
d) Getting Treasury fully staffed up, which it isn’t yet.
Perhaps the Administration is holding out hope that there will be some sort of spontaneous recovery in the financial condition of the banks — and perhaps that hope is completely naive — but I don’t think this is what is driving the policy decision. The four reasons that I provided above are sufficient to explain the obfucsaction and the delays. And remember, the Administration can’t really talk about nationalization until and unless it is ready to nationalize, since merely talking about nationalization would tend to make that outcome inevitable. If (when?) a decision is made to nationalize Citi or BoA, we shouldn’t expect a lot of advance warning.