The Great Debate

Redefining the sacred in the banking rescue

J Saft

Feb 27, 2009 05:59 EST

– James Saft is a Reuters columnist. The opinions expressed are his own –

Another week, another set of protestations that U.S. banks will remain in private hands, apparently almost regardless of the consequences.

It is clear that nationalization violates a sacred value for U.S. policymakers, or perhaps they believe it to be a sacred value held by voters. As we know from behavioral economics, when people are confronted by a conflict between material advantage and their ideas of the sacred, they tend to opt surprisingly often for the sacred.

Sometimes that is utterly right, but in this case it is really a false opposition. The Federal Deposit Insurance Corporation takes control of failed U.S. banks almost every Friday, and while taking some of the biggest over would pose huge problems, it should be possible to do it, to speed recovery and to hang on to what is essential: a market-driven system of capital allocation and a credible 3- or 4-year glide path to privatization for those assets and institutions that end up in taxpayers’ hands.

Fed Chairman Ben Bernanke added his voice to those maintaining that the crisis would be contained — no, wait, that was 2007′s line — that the banks wouldn’t be nationalized.

“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke told the Senate Banking Committee on Tuesday.

“What we can do is make sure they have enough capital to fulfil their function and at the same time we exert adequate control to make sure that they are doing what is necessary to become healthy and viable over the longer term,” he said.