Why Nationalizing America’s Banks is a Loser

by Fred Siegmund

In the current financial crisis, there continues to be people in banking and business calling for nationalizing banks. One recent example is an article in the Atlantic Magazine titled “The Quiet Coup.” The author, who is from the International Monetary Fund and has experience with international financial crises, writes that nationalization would not mean permanent state ownership.

“It would allow the government to wipe out bank shareholders, replace failed management clean up the balance sheets, and then sell the banks back to a private sector,” he writes.

Nationalization does not solve one problem that could not be solved without it.

America has to have a banking system, and wiping out one to replace it with another does nothing to address the political causes of the banking crisis. America’s bankers played the central role in creating America’s banking crisis, but their influence continues to prevent the reforms that are needed.

Bankers and the financial community gained extra political power beginning in the Reagan administration, continuing through the Clinton years and to the present. Congress slowly changed or abandoned regulatory protections that began as far back as 1933 with the Glass-Steagall Banking Act.

America’s banking regulations previously recognized the unique and paramount responsibility of commercial banks: to provide customers with checking account services and guarantee reserves are available to pay on customer checks. Congress passed the Glass-Steagall Act to prohibit commercial banks from diversification into other financial services such as using loanable funds to underwrite corporate security offerings.

In 1933, Congress feared a bank’s security offerings department would pressure the bank’s lending department to take risks that could lead to bank failure. They feared banks could manipulate stock prices or pressure their loan customers to buy stock offerings, or take control of other non-financial corporations.

By the 1980’s and 1990’s, the relentless pressure of financial groups and plenty of campaign contributions turned caution into compliance; Congress allowed banks to diversify and consolidate into giant risk takers too big to fail.

Millions bought bank stocks because banks will never be obsolete and they had the reputation of being steady, safe and conservative investments paying modest but steady dividends. Even without nationalization, those millions have lost 50 to 90 percent of stock value and dividend income that will never be recovered. Those same millions had nothing to do with the gambling and risk taking of the banks they supposedly own but do not control.

Wiping them out with no further chance to recover some of their losses is unfair but also unnecessary.

The so-called toxic assets will have to be written off with or without nationalization. Reserves will have to be restored to the banking system with or without nationalization. Nationalization does not reform the banking laws, but just starts the whole thing over. Nationalization does nothing to encourage anyone to invest in banks, ever.

We can be thankful the Obama Administration has been resisting these calls. We hope they continue and we hope they will get around to proposing the necessary return to cautious banking practices. Perhaps the time is not right in their political judgment. We will wait, but in the mean time, nationalizing banks is a loser.

Fred Siegmund covers America’s jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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