Nationalization by autumn, bank on it
– James Saft is a Reuters columnist. The opinions expressed are his own –
Like it or not the United States will be forced to nationalize large swathes of its banking system by the time the leaves fall from the trees in Washington.
The tragedy is that we will have to wait that long and that the costs will mount.
The plan to rescue the banks, or, er, the people, as enunciated by Treasury Secretary Geithner, is no plan, only an apparent set of contradictory principles: an ideological one not to nationalize and a political one not to subsidize too obviously.
The plan will fail unless the administration comes out in favor of either subsidy or seizure of failing banks. Either the United States will be forced to nationalize when that becomes apparent or perhaps it is waiting until that failure makes nationalization more politically palatable.
In either event, it is a terrible mistake and the cost will only grow, both in direct terms for taxpayers and more broadly for the growing number of people with too little income to pay tax.
Geithner laid out a plan to apply stress tests to large banks and require those that do not pass either to raise capital (from whom exactly, I hear you ask) or to accept an injection of convertible securities from the government on terms that have not been defined. Banks that take government coin will have limits placed on their compensation and other actions.
I think you are wrong. What you miss is that the market in distressed or toxic assets will come to life and the values will start to rise. This happens if and when the number of foreclosures can be reduced and credit becomes available for those who wish to buy property. Once the real estate market hits bottom, distressed asset values rise, balance sheets firm up and the economy improves rapidly. By the end of this year, what we now call toxic or distressed assets may actually become desirable again and banks that own it attractive.