Saving the financial system without a national industrial policy is worse than useless
Sorry, President Obama, there simply is no time for a honeymoon. As you said in your Inaugural Address yesterday, "The ways we use energy strengthen our adversaries and threaten our planet." Unfortunately, it seems that this idea has not yet filtered into your administration’s thinking and planning regarding what to do about the financial collapse.
Without a national industrial policy, saving the financial system really makes no difference. The underlying problem is that the financial, economic, and monetary arrangements of the past half century – creating financial paper which is traded for oil, which is then used to build suburban and exurban sprawl, the value of which underpins the creation of the financial paper and the dollar – has, since summer 2007, collapsed into smoldering ruins. We need to return to a production-based economy, not try to resuscitate the speculation based sprawlconomy. The key is to move the U.S. economy off of its base of burning fossil fuels, and into the future. That requires a national industrial policy - whatever you want to call it to calm the demons of free market ideologues doesn't matter. But in his letter to Congress on January 15 regarding the approval of the second $350 billion of the Wall Street bailout, Larry Summers, Obama’s top economic advisor, sought to assure congressional leaders that “our actions will reflect the act’s original purpose of preventing systematic consequences in the financial and housing markets,” and the new Oabam administration, “has no intention of using any funds to implement an industrial policy.”
Whatever we end up doing with the financial system will only succeed if we tailor what we do to this objective of moving the U.S. economy away from burning fossil fuels and into the future. The financial system should be serving that great national purpose. But for the past three decades, it has been obstructing it, by channeling credit into the building of suburban sprawl, and by financing speculation on the trend of peak oil - which just a few months ago delivered us gasoline at nearly five bucks a gallon.
So, we must fuse together these two questions: how to save the financial system, and how to get the U.S. economy going again. It makes no sense to try and keep alive utterly failed the financial, economic, and monetary arrangements of the past.
Two days ago, Kevin Drum threw down the gauntlet and challenged anyone to present a good case for the nationalization of the banks. This, of course, echoes the interesting brawl between Bonddad (Why TARP Was -- And Is -- Still Necessary) and Jerome a Paris (Oh boy - TARP was not necessary and it's a trillion dollar robbery) on Dailykos the same day.
Keeping in mind the need to adopt and pursue a national industrial policy, I bring to you this from the editors of investment website Seeking Alpha.
When a bank is nationalized, shareholder equity should be written to zero, and existing management should be handled as roughly as the law allows. If we have a bit of courage, we should impose haircuts or debt-to-equity conversions on unsecured creditors, but I don't think we have that kind of courage. "Toxic" assets should be revalued at pennies-on-the-dollar market bids or else written to zero and hived into "bad banks". Once we have a conservative valuation of the assets and know exactly what is owed, we'll know how much public money would be required to cobble a robustly funded bank from the wreckage. However, if we recapitalize "too big to fail" banks without restructuring them, we will quite deserve our next mugging. We had better cut these monsters into little, itty, bitty pieces. We should embed strict size and leverage limits into their itty, bitty charters, restrict their ability to recombine, and then hire management to run the little things on strictly commercial terms. Hopefully we will change what it means for a bank to run on commercial terms — we should create a tax and regulatory structure that penalizes scale and leverage across the board. Better yet we should decouple the payment system from risk investment by reorganizing banking functions into "narrow banks" and credibly not-guaranteed investment vehicles.
At the end, they provide an extremely extensive and useful list of links - all within the past few days - on the issue of nationalizing the banks.
Some nationalization links
- Buiter — Time to take the banks into full public ownership
- Clusterstock — More Cries For "The Swedish Model" To Fix Banks, Why Are We So Afraid To Fix Banks The Right Way?
- Cowen — Why bank nationalization is a last resort, Is the Sweden plan so much better?
- Dillow — Arguing about bank nationalization
- Drum — Kevin Drum Smackdown Watch, Nationalization Revisited, Nationalization
- Fama — Government Equity Capital for Financial Firms
- Fox — Why hasn't the government nationalized Citigroup? Hank Paulson's sort of answer, The case for nationalizing Citigroup and Bank of America, and getting Robert Reich a fact checker
- Free Exchange — Why not nationalise?
- Hempton — Nationalisation after due process
- Jones — Nationalisation linkfest
- Kedrosky — Bank nationalization: Why Are We Pretending?
- Krugman — Wall Street Voodoo
- Gaius Marius — nationalization now!
- McArdle — Why not nationalize, like Sweden?
- Quiggin — What to do with nationalised banks?
- Salmon — The Urgent Financial Crisis Facing Obama, Insolvent Banks: Why a Debt-for-Equity Swap Won't Work, Felix Salmon Smackdown Watch, More on Bank Nationalization, Why Nationalization is the Best Alternative, Why We Should Nationalize Now, Nationalize Citigroup and Bank of America
- Surowiecki — Nationalization will not be easy, Where would bank nationalization stop?
- Yglesias — The grain
I also want to point to Stirling Newberry’s latest two pieces, which ably crucify President’s Obama economic policies. Here's the short version, from today.
And here's the long version, from yesterday. It is not for the feint of heart, nor for those with limited attention spans.