Roubini: The Banks That Were Too Big to Fail Are Now Even Bigger to Fail; He Sees Nationalization and Breakups Ahead
February 23rd, 2009What does this mean for the dollar? Two economics professors discuss what would be the most radical financial policy in the U.S. in the last century and the fate of the dollar doesn’t come up once?
All of this bailout nonsense seems to have been a series of shell games. The pea they’re trying to hide represents the big bomb contained on the balance sheets of the banks that we still don’t know about.
What happens when these banks are finally nationalized? What finally happens to the pea/bomb?
How do you “clean them up” as Roubini says, without the dollar collapsing?
Via: Wall Street Journal:
Mr. Roubini tells me that bank nationalization “is something the partisans would have regarded as anathema a few weeks ago. But when I and others put it in the context of the Swedish approach [of the 1990s] — i.e. you take banks over, you clean them up, and you sell them in rapid order to the private sector — it’s clear that it’s temporary. No one’s in favor of a permanent government takeover of the financial system.”
There’s another reason why the concept should appeal to (fiscal) conservatives, he explains. “The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks.”
In any case, Republicans must now temper their reactions, he says. “The kind of government interference in the economy that we saw in the last year of Bush was unprecedented. The central bank — supposed to be the lender of the last resort — became the lender of first and only resort! With our recapitalizing of financial institutions, and massive government intervention in the markets, we’ve already crossed a significant bridge.”
So, will the highest level of government be receptive to the bank-nationalization idea? “I think it will,” Mr. Roubini says, unhesitatingly. “People like Graham and Greenspan have already given their explicit blessing. This gives Obama cover.” And how long will it be before the administration goes in formally for nationalization? “I think that we’re going to see the policy adopted in the next few months . . . in six months or so.”
That long? I ask. “Six months from now,” he replies, “even firms that today look solvent are going to look insolvent. Most of the major banks — almost all of them — are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness.
“Between guarantees, liquidity support, and capitalization, the government has provided between $7 trillion to $9 trillion of help to the financial system. De facto, the government is already controlling a good chunk of the banking system. The question is: Do you want to move to the de jure step.”
Yet another reason why bank nationalization is a good idea, Mr. Roubini continues, is that “we started with banks that were too big to fail, but what has happened, in the process, is that these banks have become even-bigger-to-fail. J.P. Morgan took over Bear Stearns and WaMu. BofA took over Countrywide and then Merrill. Wells Fargo took over Wachovia. It doesn’t work! You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing.
“So if you took over a big bank, and you split the assets in three or four pieces, maybe you create three or four regional or national banks, and they’re stronger! Nationalization — or ‘temporary receivership,’ if you like, if the N-word is a political liability — is an occasion to undo the sort of consolidation that has created an even bigger systemic problem. And the only way to do it is by essentially taking them over and breaking them up.”
What will happen to the dollar if the banks are nationalized is a very interesting question. I don’t understand a lot of the nationalization issue, at all.
But as the banks and the Federal Reserve have been working, they have been creating money (dollars and profit) from issuing debt. So we have a debt-based dollar system. The banks have created money at will.
When banks are nationalized – and I surely hope the Federal Reserve becomes part of the package, the federal government (the Treausury?) is the entity that is in charge of “printing dollars.”
If the “printer” isn’t someone trying to cover their ass because of all of their debt instruments. Hmm. That part sounds good to me.
Nationalizing the banks at least would take the control of “making money” out of bankers hands and put it in the governments hands.
Whether the Treasury or those in charge of the nationalized banks will be better than how banks have handled since the 1930’s is not in my crystal ball this cold evening.
What will happen to the dollar? Many write that the dollar is being manipulated by the PPT. The PPT are bankers. If bankers are out of the equation re the dollar, I think the dollar will lose a lot of its appeal as a future’s trading instrument. It will become like the pound. Boring. Not something the futures traders will be interested in. Which actually, to me right now sounds like a good thing.
Full disclosure: Mom’s money is an investment instrument betting against the dollar.
I for one think the dollar settling down to something – geez, one could only hope for the gold standard (puh-leez!)that is not based on banker debt would be a good thing.
I’m scared to post this, but here goes.
Eileen,
“Nationalize” is a useless word. It’s like “green” or “country” or “organic” – it’s been co-opted. It means nothing specific, or in anyway helpful, anymore.
By “nationalize”, of course, (and as you know) what’s meant is: certain people “in office” will nominally pledge “tax-payer” money against insolvency of whatever firms they deem they’ll benefit by favoring.
But the gig is: “tax-payer” money means NOTHING…at least for the time being. The hope is that it WILL mean something later…say sometime after April 15th of this year…or perhaps next year at the outside…
But to cut to the chase: I seriously doubt it ever will. The “Elephant in the Room” is that “tax fraud” – for want of a better description – is already front-page news across the board, whether it’s US gov’t apointee’s or $$$-multi-billion hedge-funds or just Joe Six-Pack on Main St.
Middle-class taxpayers will be dodging their taxes in droves, beginning this year.
So the bluff in this year’s hand of poker is the pledge of future tax-payments against “physical delivery at a future date”.
And that, of course, is the very basis of every Ponzi-scheme ever played.
Still….maybe it’ll play itself out…..this year. I doubt it highly, but what do I know? The important thing is that the idiots who head the World’s financial institutions might buy into the scam for just another year longer.
They ARE idiots, in the full sense of the word. So they well might.
After all, they’re clearly complete idiots for believing it this long already…