Former Emperor of the Economy Federal Reserve Chairman Alan Greenspan has come out in favor of nationalizing banks to stem the financial crisis; this is one of the most pivotal statements made during this economic crisis:
Worst crisis in 100 years? Wait, but the Great Depression was only 80 years ago...
“It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring. I understand that once in a hundred years this is what you do.”
Alan Greenspan’s word was once law; economic analysts would pore over his every statement as if they were tea leaves. Furthermore, he was the chief protector and cheerleader of USAmerican (and global) capitalism. For someone of his stature and ideology to suggest nationalization of banks is basically to guarantee that it will happen (and the article linked above has this quote: “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”). Of course, the Obama administration has never had is yet to have anything good to say about nationalizing banks…
I also talked about the prospects of the nationalization of banks a couple of weeks ago.
At this point in the financial crisis (sidenote: there needs to be a clearer distinction made in the general conversation about the economy between the financial crisis and the overall economic crisis: the financial crisis involves the financial sector and the main problem is that banks are not lending money which is necessary for the basic functioning of a capitalist economy; the economic crisis is the wider situation involving not only the financial crisis and the housing crisis (which is entangled with the financial crisis) but the overall meltdown in almost everyone economic sector caused by the collapse of the financial sector), multiple attempts have been made to solve the freeze in the lending market, from the original TARP plan to the completely modified TARP plan under Treasury Secretary Paulson (R-Goldman Sachs) to the multiple iterations of the proposed plans of Treasury Secretary Geithner (just to make sure everyone knows, Geithner failed to pay $30,000 in taxes and he is the Cabinet official in charge of the IRS…). Needless to say, none of these have worked yet. To be clear on where things stand in terms of any “solution” or “recovery, for the wider economy to stop crashing, the financial sector needs to start lending money again first.
To get an idea of what course of action makes the most sense in solving the financial crisis, it is important to understand what is causing the ongoing financial crisis’s problems. As mentioned above, banks have a large amount of assets that are highly complex bundles of things (financial instruments), some these things are subprime mortgages for example. Many of these assets are the so-called “toxic assets” (or “troubled assets” as the Troubled Asset Relief Program (TARP) refers to); these bundles were basically bought by banks at a much higher value than they are worth now due to the collapse of the housing market bubble (which, as the name implies, was an over-inflation of the market’s prices for real estate). All the big banks (of which there are essentially only three remaining: Bank of America, Citigroup, and JP Morgan Chase) have so much of these over-valued and over-leveraged (over-leveraging is the second key part of the financial crisis) assets that they are basically insolvent (read: bankrupt). When a compnay is insolvent/bankrupt, it goes into bankruptcy proceedings. Through the political power of the banks and the overall financial sector, the banks have been able to avoid bankruptcy proceedings. Which leads us to the situation we are in now: banks are bankrupt and lending has stopped as a consequence.
Of course, if the banks went through bankruptcy, their equity holders would lose all of their money… like would happen when any company was bankrupt. However, this has been prevented by those who would lose money from bankruptcy due to their massive control over politicians (which they have because they are so ridiculously rich). Therefore, we have had all of the attempts to save the banks from facing up to insolvency. Most of these ideas center around the idea of the government propping up the value of the toxic assets so that the banks do not have to account for their massive depreciation. The government has given out, literally, trillions of dollars (some estimates put it at $10 trillion); for a perspective, the USAmerican GDP – the sum of all of the economic activity of the United States (the largest economy in history and 18% of the entire world economy) in a year – is $14 trillion. This is money that comes from the general public of the United States. Every person is being made to pay for these banks, specifically the equity holders, to not lose money; fundamentally, either the bankers have to lose money for what they have caused or we have to lose it for them. These banksters are stealing from the poor (99% of the United States, if you consider someone is poor if they make less than 1/3 of what the rich make (for comparison, the poverty rate is more than 1/2 of per capita GDP)) to give to the rich. It is likely that this is the largest transfer of wealth (up or down) in history.
Yet, it hasn’t worked. Maybe Geithner’s plan will have more success, but it seems that it is generally agreed that it has less chances than the past two (three, four?) bank bailout plans (see: above discussion of consensus on nationalization immediately after the Geithner plan is released). So, whether the Obama administration tries the Geithner plan and fails or gives in to the growing consensus – left and right – we appear headed for nationalization (finally).
As a closing note, there are other alternatives out there. The Baseline Scenario (one of the “Big Three” economic crisis blogs; the other two being Paul Krugman’s blog and Brad DeLong’s blog (there are other important ones, of course: Mark Thoma’s blog, Calculated Risk, Marginal Revolution, The Big Picture, Dani Rodrik’s blog, Beat The Press, and, certainly, Robert Reich’s blog)) has an informative post on the idea of a so-called “Good Bank”. And, obviously, we could “solve” the financial crisis (whatever “solving” that is supposed to mean…) by abolishing the financial and capitalist system. As a simple argument, why would we want to solve and preserve a system that, in crisis and not, forces people out of our homes, denies us basic healthcare, and unnecessarily makes us slave for 1/2 of our waking adult life?
