Bank Nationalization Is On Its Way

by Pejman Yousefzadeh on April 20, 2009

An MSNBC/New York Times report indicates that the Obama Administration will go forth with bank nationalization by converting TARP aid into common stock shares in banks. The beauty of this approach, from the standpoint of the Administration, is that it avoids a showdown with Congress over bank nationalization by allowing nationalization to take place without any further Congressional authorization.

I am sure that the Obama Administration’s political shop thinks this is a wonderful thing, but quite frankly, the rest of us should be concerned. As always, when dealing with the issue of bank nationalization, it is worth reminding people that government doesn’t know how to run banks, and that as a consequence, we should not want government to get involved in bank governance through the possession of common stock. Additionally, as the story indicates, there is no way to tell how much the common shares will be worth when it comes time for the government to sell them, which means that taxpayers will be on the hook if the eventual sale of common shares brings in less than government hopes for.

For those who think that government would look to get out of the nationalization business as soon as humanly possible, think again:

Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”

Sounds innocent enough, but given the number of TARP recipients who now are desperate to pay back the money they received–plus interest–and are having their payments denied, there are plenty of people who are suspicious that government is not willing to give up the power that comes with having its nose in the tent of private business.

This is why it is so important that any nationalization of banks receive Congressional blessing, rather than proceeding through the back-door, as the Administration apparently wants to do. We are talking about a very serious and important issue here, one that deserves full public debate. That the Administration seems to want to short-circuit that debate simply because it wants to avoid a political fight should alarm us all.

Previous post:

Next post: