Greenspan backs bank nationalisation

[Michael Stuart Kelly]

I am repeating this from another thread. It is self-explanatory.

It's been years since I felt like I needed a drink. I'm not going to (I can't, as everyone knows), but I feel like knocking back a good strong dose of rot-gut...

Now this makes me physically, morally and philosophically sick to my stomach:

http://www.ft.com/cms/s/0/e310cbf6-fd4e-11...?nclick_check=1

Adam,

I registered with FT just to read the article.

Greenspan backs bank nationalisation

By Krishna Guha and Edward Luce in Washington

February 18 2009

Financial Times

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.

. . .

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

. . .

I join you in feeling sick to my stomach...

Michael

[Backlighting]

May I join you all for a drink?

AR would too, after throwing up.

[Greybird]

"No demon," eh?

{rueful smile}

[Michael Stuart Kelly]

Steve,

In Brazil, they call this swallowing the frog. I just swallowed a frog.

To be objective, Greenspan did say nationalize "some" banks, not "all" banks, not even the Fed, and he did say "temporary."

Horseshit. None of it is comforting. We all know where that stuff goes...

Where is Andrew Jackson when you need him?

Michael

[Michael Stuart Kelly]

Just so we won't think this is as bad as it can get, rest assured that it can get worse:

Greenspan says Tarp needs boost

By Krishna Guha in Washington and Alan Rappeport in New York

February 18 2009

Financial Times

The US administration will have to go back to Congress for more money to recapitalise the banking system, Alan Greenspan, the former chairman of the Federal Reserve, said on Tuesday.

While Mr Greenspan did not say how much extra funding might be required, his comments suggest the need for hundreds of billions of dollars over and above the funds remaining in the troubled asset relief programme.

According to prepared remarks, the former Fed chief was to tell the Economic Club of New York that “to stabilise the American banking system and restore normal lending, additional Tarp funds will be required”.

. . .

Mr Greenspan said “there is obviously a limit to the expansion of US federal debt”. The recent rise in long-term interest rates “may be signalling market concerns” about future US inflation.

The former Fed chairman said he now acknowledged there was “no alternative to a set of heightened federal regulatory rules for banks and other financial institutions”. However, he suggested that, rather than rely heavily on regulators to prevent the next crisis, the authorities should simply increase the amount of capital that banks were required to hold at all times.

. . .

Mr Greenspan offered an implicit defence of his tenure as Fed chairman during the question and answer session after his speech. Asked what could have been done differently to have made the crisis less severe, he explained that the paradox of successful monetary policy is that it often leads to periods of euphoria.

Although economic models can illustrate how to suppress asset bubbles, Mr Greenspan said that in the real world he is not aware of a way to stifle them.

“If somebody can find a way to make it work, I would be a most avid supporter of that action,” Mr Greenspan said.

This is a dream-come-true for President Obama.

Michael

[Christopher]

Just so we won't think this is as bad as it can get, rest assured that it can get worse:

Hi Michael,

I'm not quite sure I understand how this makes things worse. Admittedly, there is a lot going on right now I don't understand, and I'm looking forward to sitting down and going through all Monetary Masters links you added.

Basically, I see three ways to handle the current crisis:

1. let the banks go bankrupt

2. nationalize the banks

3. add restrictions to the banks

Item 1 might lead to an economic (and well-deserved) collapse, but god knows nobody really wants the economy to collapse, we just want people who make stupid mistakes to take responsibility for those mistakes. Would letting banks collapse lead to an economic collapse at all? I'm not even sure, since I only have news propaganda. It would surely make my stocks drop to nothing, and I might even lose some savings if I have it invested in the wrong institutions.

Item 2 I tried to think positively about, but all I could think of was Iceland. The only good reason I can figure to nationalize banks is to lower the corrupt influence the banking industry has on government policies (The Fed, stimulus package, etc.). Unfortunately, all I could think of was Iceland, Iceland, Iceland. The corruption source would merely change, but the corruption (and taxpayer liability) probably wouldn't get any better.

Item 3 seems a logical choice, which is why I'm confused about your comment. To force banks to hold more money (perhaps 20-30%) of what they are lending places the banks in a position that requires more accountability when loans go bad as extensively as we're seeing now. Sure, government intervention is generally thought of as "bad," but that's only when such restriction actually hinders laizze faire, not when such restrictions are meant to support laizze faire - there are an infinite set of such examples, including the backing of contracts, honest advertising (printing ingredients on foods), etc. Therefore, we have to ask whether government "restriction"/intervention moves the bar closer or further away from a free market. Here's a basic ethical question: should banks be allowed to lend out more money than they actually own? This forces us to address monetary policy and credit at it's core.

Anyway, I'd love to hear more about your thoughts on this specific intervention.

Chris