CRITICS claim that long-run growth of the private sector investment in Bangladesh was affected seriously during the early years of independence due to the policy of nationalization. Soon after coming to power, the then government nationalized the industrial and the financial sectors through different Presidential Ordinances in 1972. However, the main reason for nationalization was to find a better way to utilise abandoned properties by the erstwhile West Pakistanis after independence. The ruling party's ideology of nationalism, secularism, democracy and socialism was another reason. Today, the US is showing us a great magic, i.e., how nationalization can even be done under free market concept!
People, who always opposed government intervention in the market, have changed their mind, and now advocating bank nationalization. Alan Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, in an interview with the Financial Times (FT) on February 18th said that "once in a hundred years" the government needs to take over the banks, and now is the time. He also told the FT that "it may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring." Sen. Lindsey Graham, a Republican from South Carolina, has called for doing what works and said "if nationalization is what works, then we should do it." Paul Krugman, 2008 noble laureate in economics, also supported bank nationalization in his different articles in the New York Times (NYT). Though Obama team already denied that they won't nationalize banks, it became inevitable. But has why nationalization of banking system in the US become so unavoidable?
Earlier USA was bailing out banks since they were posing systematic risk through "too big to fail" strategy, but what has happened, in the process, is that these banks have become even-bigger-to-fail. For instance, J.P. Morgan took over Bear Stearns and WaMu. Bank of America (BofA) took over Countrywide and Merrill. Wells Fargo took over Wachovia. Putting two zombie banks together is like having "two drunks trying to keep each other standing".
Nationalization is an opportunity to undo all the policy mistakes that have created now an even bigger systemic problem. The only way to do it is by taking those big zombie banks over, and split the assets in parts, and then create several banks, and they're stronger!
Also, since last year, trust or "animal spirit" in the financial institutions has evaporated. Without trust and without confidence, commerce will come to a standstill. Confidence would be restored to the banks almost overnight, to their obligations and lending capabilities, if a comprehensive nationalization of the zombie banks were to be mandated by the government.
Furthermore, the government is already controlling a significant portion of the banking system. Through guarantees, liquidity support, and capitalization, the government has provided between $7.0 trillion to $9.0 trillion of help to the financial system. For instance, Citigroup has $93 billion in equity, most of which is claimed by preferred shareholders, almost all of whom are the government. BofA has a market cap of $29 billion, after the government pumped in $45 billion of capital. So supporter of nationalization is claiming that financial system including those two banks is already effectively nationalized at least to some extent. And to make those two banks more competent and clean, they should be taken over by the government at least temporarily.
Though some critics of the bank's nationalization plan say that a privately held banking system is the correct way to go, after bailing out major banks what the US banking system has now isn't private venture anymore, it's "lemon socialism", that is, shareholders and executives get all the benefits but taxpayers bear all the risks. And it's creating moral hazard and perpetuating zombie banks, thus, blocking long expected economic recovery.
Moreover, banks must be nationalized. The collapse of Lehman Brothers in last September almost destroyed the world financial system. During mid-September, TED spread went at its all time high to 465 basis points which are even now around 100 basis points. Money market dried up totally. Trust from the market evaporated in this process. So, USA can't risk letting much bigger institutions like Citigroup or Bank of America implode.
Most importantly, if market continues to fall, and there is a strong possibility of happening so, banks, for instance, Citi and BofA, will lose billions in next few months. And their capital isn't large enough to cover those potential losses. Even banks that today look solvent are going to look insolvent within few months. To end their zombiehood in the financial system, the banks need more capital. But they can't raise more capital from private investors or from the market. So, the government has to supply the necessary funds through nationalizing them, at least for a short period of time.
But how would nationalization take place? At the beginning, the Obama team was considering to do "stress test" to test banks' sustainability. If a bank fails in "stress test", it won't get taxpayers money, and instead will be given a contingent funeral. If a bank sustains the test, it will be nationalize which will wipe out or dilute current shareholders. However, some economists are suggesting following Sweden's example. In the early 1990s, Sweden took over its banks, restored them to health and a couple years later privatized them again. But President Obama replied, "… Sweden looks like a good model. Here's the problem; Sweden had like five banks. We've got thousands of banks".
Bank nationalization is nothing new in world financial history. From Bangladesh to USA, nationalization took place on different occasions. France nationalized its banking sector, and then privatized it again. Even in the US, Federal Deposit Insurance Corporation (FDIC) took over hundreds of institutions during the savings-and-loan (S&L) crisis in 1980s. FDIC aggressively sold off bad assets, and the experiment is now appreciated as a success. Though nationalization is the kind of pragmatism that leads to socialism, it is the only option left to give life to the "dying" banking sector in the US.
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