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.”
Perhaps….
But it sure seems unlikely that the same governing entity that so poorly manages Freddie/Fannie is to control yet more financial institutions.
Bizarre.
Don
Al’s come a long way from Rand.
So what exactly would Expert #1 and Expert #2 do with a huge bank if:
(1) the bank’s liabilities exceed its assets;
(2) the bank has a valuable business franchise and under normal circumstances would be desirable to acquire; and
(3) no one is currently willing to recapitalize or buy the bank, partly because investors are conserving their cash and partly because of enormous uncertainty about the value of the bank’s assets.
If the bank’s liabilities exceed its assets, bank regulators could, and eventually must, place the bank in “receivership”—the bank equivalent of bankruptcy. The FDIC would take control of the bank, pay depositors, and use what then remained of the bank’s assets to pay other creditors. As part of this process, the bank’s stock would become worthless and its shareholders would have no further stake in the bank.
So what does the FDIC do next? It could simply liquidate the failed bank. But the FDIC has the option of using the failed bank’s assets to create a “bridge bank” to continue the old bank’s business until the FDIC could find a buyer for the bank.
Given the paucity of investors willing to buy large, troubled banks—and the enormous current uncertainty about the real value of the bank’s assets—creating a bridge bank would probably cost the FDIC less than the alternatives.
If the facts are indeed as specified here, why exactly would our esteemed experts object to creating a bridge bank?
Remember that leaving an insolvent government-insured bank in private hands creates problems of its own, including the temptation for incumbent managers to gamble with the bank’s assets in the hope of making enough money to become solvent again. In “gambling for recovery,” the managers would seek to salvage their own jobs and the shareholders’ investment. But gambling for recovery rarely works and usually makes the insolvency much worse. That’s what happened during the thrift debacle.
My objection to creating a “bridge bank” is that, as Milton Friedman once quipped, there’s nothing quite so permanent as a temporary government program. I’m fearful that these banks will become subsidized competitors to private institutions.
I’d much rather see the bank’s assets liquidated at whatever price the receivers can get at that time. I realize that this might find some getting super deals on so-called toxic assets that turn out to be perfectly serviceable, but them’s the risks. This will allow the market to find its bottom much more quickly and the economy to recover that much sooner.
[i] My objection to creating a “bridge bank†is that, as Milton Friedman once quipped, there’s nothing quite so permanent as a temporary government program. I’m fearful that these banks will become subsidized competitors to private institutions [/i]
Jeffersonian [#4]: A fair point. I too would object to permanent or long-term government ownership of these banks. But the FDIC has had bridge-bank authority for 20 years and all bridge banks have been sold or liquidated.
BTW, Milton Friedman favored government deposit insurance.
Nothing like a free market saint / prophet to suddenly become an apostate of market fundamentalism.
Alas, reality beckoned and destroyed the illusion that finance is God.
I would note #1 that the government did not run Freddie. It was run by the same sorts of people who go into finance.
[i] The government did not run Freddie [/i]
That’s correct. The government neither owned nor ran Fannie Mae and Freddie Mac.
Ginnie Mae, which the government does own and run, operated more conservatively and is in much better shape.
[blockquote]Jeffersonian [#4]: A fair point. I too would object to permanent or long-term government ownership of these banks. But the FDIC has had bridge-bank authority for 20 years and all bridge banks have been sold or liquidated. [/blockquote]
An FDIC receivership is a far cry from full-bore nationalism.
[blockquote]I would note #1 that the government did not run Freddie. It was run by the same sorts of people who go into finance. [/blockquote]
Uh, no. It was run primarly by Clinton-era retreads, soon-to-be Obama advisors and Barney Frank boyfriends who pumped it for millions using massively fraudulent practices. It also didn’t have to follow the same regulations as its competitors.
“I would note #1 that the government did not run Freddie.”
Freddie/Fannie operate under different rules than other institutions. It was these rules to which I refered, not the management. In fact, I would call the relationship between government and Freddie/Fannie as managerial incest which led to fiscal incest.
Don
[i] Uh, no. It was run primarly by Clinton-era retreads, soon-to-be Obama advisors and Barney Frank boyfriends who pumped it for millions using massively fraudulent practices [/i] —Jeffersonian
Jeffersonian [#10]: Comments like would befit a paid political shill, which you are not. Seems like there’s little point in debating with you.
If you can find a single syllable in error with my assertion, Irenaeus, I welcome the correction. However, I know that I am not in error. Not unless Frank Raines, Jamie Gorelick, Rahm Emmanuel and Jim Johnson are not who I think they are and Barney Frank’s love interest was not an exec at Fannie.
Fannie and Freddie were and are cheek-to-cheek with the government (GSEs are, after all, “Government”).