Nationalization
There is no doubt these initiatives will relieve some of the pressure on the financial system. But will that be enough?
Economist Paul Krugman, a leading critic of the Administration, believes these efforts will amount to little more than “rearranging the deck chairs on the Titanic.” Krugman favors full-on nationalization of the “zombie” banks. Although this scenario is slightly different from the Obama game plan, it attempts to achieve the same result with a different variety of Federal intervention.
In this approach, stabilization would result from the Federal government establishing a receivership over all assets and liabilities of insolvent banks. This might be similar to the procedures the FDIC already implements to deal with failed banks, but these would have to be implemented on a much larger scale, and would require massive Federal funds. Krugman believes it would require about $1.5 trillion, or about 10% of our gross domestic product (GDP).
The Obama Administration considers the idea of nationalizing such large banks “deeply impractical,” according to Newsweek. The United States has more than 8,000 banks, and the Federal government does not have the manpower to oversee the assets of that many institutions in anything like the detail that would be required to do a decent job of disposing of the assets. If even a small fraction of these 8,000 banks had to be nationalized it would overwhelm to personnel available at the FDIC and the Treasury Department.
And there would be so many unknowns. How much would it cost taxpayers? No one knows. How would the banks be privatized again? No one knows. Would the banks still make loans the same as before, or would they reflect Federal priorities rather than profit motives? No one knows.
The Obama Administration clearly has no desire to proceed down the path of nationalization. In the Obama-Geithner-Bernanke Game Plan, Stabilization, if it is achieved, will be brought about by the combined efforts of many agencies of the Federal government with the cooperation of hedge funds and large fixed income investors, like Pimco. The free-market will resume its normal efficient functioning after the excesses have been purged from the system.
Doctor Doom
Nouriel Roubini, the famous “Doctor Doom,” analyzed the housing bubble and predicted the financial crisis of 2007-8 about 9 months before others realized what was happening. Many believe that he sides with the apocalyptos in this debate, and predicts a full-blown deflationary depression. As he publicly wrote in Foreign Policy Magazine in January 2009: “Last year’s worst-case scenarios came true. The global financial pandemic that I and others had warned about is now upon us. But we are still only in the early stages of this crisis. My predictions for the coming year, unfortunately, are even more dire: The bubbles, and there were many, have only begun to burst". In conclusion, Roubini adds, "This will be a painful year. Only very aggressive, coordinated, and effective action by policymakers will ensure that 2010 will not be even worse than 2009 is likely to be.”
Roubini, however, does NOT believe that a deflationary depression is likely to be our fate. He worked with Treasury Secretary Timothy Geithner in the Clinton Administration, and he has more faith in the Federal response. While he continues to believe we are currently experiencing the worst recession since World War Two, he believes vigorous Federal intervention can triage the banks and save much of the financial system.
Roubini believes the entire U.S. banking system is technically insolvent. But this does not mean that every single bank is insolvent. He believes that some of the big “zombie” banks will have to be seized by the FDIC sooner or later, and this will create a colossal mess.
Unlike the true doomsday theorists, however, Roubini does not foresee large scale liquidity destruction. There will be no Great Depression 2.0 because this time the Feds understand what they are trying to do. "They are using all their policy stimulus... bazookas, rockets, missiles... and some of these policy stimulus is gonna slow down the rate of contraction." Roubini, therefore, must be aligned with the “Stabilizationists,” and ultimately with the Obama Administration, although he sweeps aside their optimism and predicts a much longer “L” shaped recession that might not end for years.
Between the poles of Obama-Geithner-Bernanke (preserve the status quo, no nationalization, no unnecessary bank failures) and Krugman (smash the status quo, nationalization now, bank failures are already a fact), Roubini stands in the middle. He favors nationalization of the "zombie" banks as the least bad option in some cases, but he also thinks they should be given a chance to grow their way out of their problems. In other words, ad hoc regulatory forebearance, such as the O-G-B team clearly intends to practice, is just fine with Dr. Doom.
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