On Wed, 4 Mar 2009, dredmond at efn.org wrote:
> It's a fine plan, and has the additional merit of requiring the
> nationalization of the banks. The difference between the face value of
> mortgages and the rapidly-shrinking underlying value is precisely why
> the US banking system is kaput. Nationalize housing finance, nationalize
> the banks!
Well, actually this isn't true. This plan wouldn't nationalize the banks because we'd pay them that difference in treasuries. And that difference is unfortunately only a small part of the banks' problems. They took that knot and buried it in concrete and threw it in the river tied to their neck.
As for nationalization itself, I'm pretty much convinced that you can only nationalize the commercial/consumer bank divisions, and not the investment bank division. Which would mean that nationalization would have to be preceded by a hugely major break-up. In addition, there would probably have to be unprecedented international cooperation before you did it to avoid a cascade of Iceland/UK stand-offs.
And even if you accomplished all that, which would have to somehow be done before you did the break-up; and even if the broken off investment banks could be trusted not to turn into whirlpools (which is half of them got swallowed in the first place); for the break-up itself to be at all useful in segregating assets into an RTC-like asset manager, you'd have to somehow segregate the bad assets with the commercial parts, even though many of them are now on the books of the other divisions you aren't nationalizing.
All of which is so hugely complicated I'm no longer 100% positive that there mightn't be a better alternative. Some form of nationalization still might be the best route. But if we go that route with these banks, it'll be down a road never before travelled with all the risks and uncertainties that entails.
Michael