The Wisdom of Not Nationalizing
Back when everyone was arguing over nationalization, it was pretty common to hear people invoke Sweden's example. Sweden had survived a financial crisis a few years before, and done so by nationalizing the country's major banks. This was pretty central to the case for nationalization. In a memo to Obama, Summers explained why he disagreed.
Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden, which was regularly cited by economists who favored nationalization. But Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe — interest rates had reached a hundred percent — that there were no other options. In addition, Nordbanken, the largest bank nationalized in Sweden, was already eighty per cent government-owned. Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.
The Treasury Department's Gene Sperling puts it neatly a few paragraphs earlier. "You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong, the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”
Nationalization is the only major policy issue I've ever written about that I never felt able to take a position on. There was a strong case in favor of the policy, and in particular, a strong case that the best possible outcome was a nationalization that worked beautifully. But supporters, I thought, were a bit too cavalier about the downside risk. This was the foundation of the administration's argument, and it seemed convincing. Particularly after I listened to This American Life report on the technical details involved in the FDIC assuming control of a small bank. Whether nationalization was a good idea in theory, it seemed pretty tricky in practice. And the cost of any serious mistakes seemed virtually incalculable.
Part of the thesis of Lizza's piece is that the Obama administration's refusal to nationalize, which was partially a result of Larry Summers's influence, has proven smart. The belief is widespread across conversations I've had with other administration officials. And some of the more prominent nationalizers -- Felix Salmon, for instance -- have decided that they were wrong and the administration was right. The argument isn't that a perfectly executed nationalization couldn't have left us in a better place. It's just that we're in a relatively acceptable place -- or on a relatively acceptable path towards a relatively acceptable place -- and we got there without risking the downsides of a botched nationalization.
Photo credit: By Linda Davidson -- The Washington Post
October 5, 2009; 5:31 PM ET
Categories: Economic Policy , Solutions
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