Alan Greenspan Vouches for Nationalization

Notorious free market proponent Alan Greenspan has said that some US banks need nationalization. The Financial Times reports:

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

This would have been an Onion article last year. It takes a real crisis to get someone like Greenspan to support nationalization.

That said, is nationalization that big a step from the system we have now? It could be, according to this NPR article:

(Some) say the threshold for defining nationalization is when the government takes control and starts expropriating property.

Simon Johnson, a senior fellow with the Peterson Institute for International Economics who has also served as the economic counselor for the International Monetary Fund, says the (2008) actions fall short of nationalization and represent "strong government support for the financial system." He says it's why the markets are up: "If you're really nationalizing, markets go down," because the private sector doesn't get market price compensation when nationalization takes place.

Economist Anthony Karidakis supports nationalization:

The trouble with capital injection, as it has been implemented so far, is that funds are being given to banks with no control over their use and by allowing the same management - the ones who drove those banks into the ground - to stay in place and try to steer those banks toward a turnaround. So far it hasn't worked. Limited, repeated rounds of capital injections under the status quo have not only failed to produce any positive signs of stabilization to date but they seem to have been accompanied by a further slide into darker territory.

One of the problems with nationalization is that it wipes out shareholders. Ideally, so the theory goes, those shareholders will be able to recoup their losses once the government sells the bank back to the private sector. On the other hand, as stated above, the fine line that policymakers are treading right now doesn't seem to be doing a thing.

What do you think would be the best course of action? Continue on the path we're on? Nationalize? Let banks fail and see what happens?

  • Neil

    Let the banks fail. Survival of the fittest.