Bill Gross of PIMCO thinks that we oughtn't to nationalize the banks because they're just too damn big and too damn complicated. His argument (as highlighted by Clusterstock's John Carney) makes perfect sense to me:
I think Roubini, Dodd and Greenspan haven't thought this one through. The U.S. isn't Sweden, and not just because our blondes aren't au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders' interests. To go further, however, and "haircut" senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.
The problem is that seeing as he's a gigantic manager of bond funds, this is also the policy that will make Bill Gross best off.
This is, writ large, the problem faced by Geithner and Bernanke: the people who know the most are those with the most to lose or gain by their actions. If they do not talk to the experts, they will do something incredibly stupid through not having thought through the possible consequences. If they do talk to the experts, their ears will be filled with advice that is both plausible and self-serving. It needn't even be deliberate deception. Anyone who's ever been moderately successful at sales knows how quickly you internalize the belief in the superior virtues of whatever it is that pays your commissions.
Writ larger, it is the problem faced by regulating a lucrative industry like finance: the bankers always undersand more about what they're doing than the regulators. There are more of them. They are paid lavishly to spend more hours at work. And they will do their best to hire the most talented and experienced employees away from the regulatory agency, while the SEC cannot hope to lure a banker away from a million dollar pot of cash. The brain drain tends to flow one way. Listen to the SEC investigator complain that she couldn't possibly have discovered Madoff's crimes with the resources available to her, and you understand the thankless task we have handed our financial regulators.
I am concerned about the sudden consensus about nationalization--I haven't yet seen a good reason to believe that a tiny bank in a tiny nation like Sweden presents a good model for tackling the problems of the largest financial services company in the world. But the fact that Bill Gross is worried about bondholders taking a loss makes me more inclined to favor the notion. It's perverse, I know.
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