Is Bank Nationalization Really the Way To Go?

Matt Yglesias puts forward some of the current arguments for nationalizing insolvent banks; Paul Krugman and Felix Salmon are pushing a similar approach.  Maybe, but I'm not yet convinced.

It's easy enough to argue that any single bank yields a superior result when that bank is nationalized rather than bailed out, for reasons ably discussed for Matt.  The problem comes with the banks that sit on the margin, namely the banks that do not yet need either nationalization or a major bailout. 
Ideally we would like to see those banks recapitalized through private capital, with any or much public sector involvement.

Now what is the policy most likely to discourage such recapitalization?  Yup, bank nationalization.  Why put your private capital into a sector that has attracted the attention of government in this manner?

The risk is that nationalization becomes a contagious idea and spreads from one bank to the next, acting as a self-fulfilling prophecy.  Even mentioning "the N word" scares off private capital, so if the government is not going to nationalize, a precommittment to that effect would be useful.  Either that, or get it over with.

Subsidies and bailouts, of course, have their own problems, most of all that they cost money.  But it also costs money to recapitalize a nationalized banking system.  I've yet to see the evidence that the nationalization option would be cheaper.  And if nationalization increases the number of banks that require assistance, one way or the other, it could well prove more expensive in the longer run.
Presented by

Tyler Cowen

Economics professor at George Mason University and author of The Great Stagnation. More

Tyler Cowen is Professor of Economics at George Mason University and Director of the Mercatus Cente and author of The Great Stagnation. He blogs at Marginal Revolution.

Never Tell People How Old They Look

Age discrimination affects us all. Who cares about youth? James Hamblin turns to his colleague Jeffrey Goldberg for advice.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Never Tell People How Old They Look

Age discrimination affects us all. James Hamblin turns to a colleague for advice.

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Video

Pittsburgh: 'Better Than You Thought'

How Steel City became a bikeable, walkable paradise

Video

A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.

Video

Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.

More in Business

Just In