Good banks, bad banks, nationalized banks

By Clive Crook

My new column for National Journal defends the administration's reluctance to nationalize banks outright, but argues that a straightforward RTC-type bad bank would be better than the proposed "public-private investment fund".

Few things about the banking crisis are clear even to the experts, and sadly the things that do seem clear, taken together, only compound the problem. One is that hundreds of billions of dollars of further taxpayer support, at least, are going to be needed to revive the financial system. Another is that taxpayers are deeply reluctant to pay one more cent. The gap between those facts is very wide, and fury over American International Group's bonuses has made it even more difficult to bridge.

Remembering what is at stake, it is surprising what a big role mere words can play. "Bonus," for instance. If the contracts offered to the financial engineers of AIG had simply promised so much cash in return for so many months of work, they might have aroused little controversy, even if the sums involved had been as large. What ignited the outrage was the idea that taxpayers should finance a bonus -- a special reward, as if in recognition of exceptional performance -- for the very people who helped destroy the firm in the first place. It does not matter that the promised payments were never intended to be bonuses of that sort. The word added insult to injury.

Another nuisance word that arouses irrationally strong feelings even though nobody seems to know quite what it means is "nationalization." One prominent school of thought holds that the administration's dithering over its financial rescue plan comes down to reluctance to use that dreaded term. The country's big insolvent banks need to be taken into immediate, outright, and temporary public ownership, in this view. Shareholders would lose everything, management would be replaced, and government would call the shots on lending policy, pay, and everything else until new private owners could be found.

In the long run, this would cost taxpayers far less than the present muddle, many argue. But much as voters hate bailing out banks with cash that promptly leaks abroad, or into bonuses, or who knows where, President Obama's Treasury Department apparently assumes that Americans hate "nationalization" even more.

Read on here [link expires in two weeks].

This article available online at:

http://www.theatlantic.com/business/archive/2009/03/good-banks-bad-banks-nationalized-banks/9789/