Bailout Report

What does “bank nationalization” mean?  What would it mean for the US government to nationalize banks?

Though anathema to classic capitalist principals and our national psyche, it may become impossible to continue hiding the negative balance sheets of US banks much longer, requiring a more assertive intervention by the government than has been contemplated to date.

We should remember that banks have always only been allowed to operate by virtue of government charter and their right to lend money beyond their own capital (sic, their right to operate on a capital reserve system) essentially represents an outsourcing of a function more properly held by government– the creation of money.

We should also keep in perspective that Paulson’s TARP I was a quick-and-dirty response to an immediate crisis of confidence that fell on the banks in the aftermath of Lehman’s bankruptcy.  Having effectively prevented a run on the banks at that time, the TARP program can be viewed as successful.  Where it has failed is in the Treasury Department’s failure to take advantage of the runway TARP afforded to create and implement a more permanent solution to the banking system’s insolvency.  Providing more reserve capital is not the answer.

It is highly likely the government’s influence on the banking system will be further elevated from regulator of the reserve system, to preferred equity investor, to controlling caretaker before the end of the second quarter.  The biggest question is whether it will be the Executive Branch in the person of the Tim Geithner or the Judicial Branch in the form of Bankruptcy judges that play the role of Master Banker.

The best hope for free market supporters is that the period of government stewardship be as short as possible.  At this point, the debate will quickly focus on whether the Nationalization is to be viewed as  temporary to allow time for the sale of good assets to private hands or semi-permanent to allow for the redistribution of wealth that might be the only means of feeding the growing ranks of the unemployed until the country rediscovers the comparative advantage. necessary to reignite the economy.