The Problem With Bank "Nationalization"

Tyler Cowen's NYT column offers the best case yet against the government taking over the banks and restructuring them:

It is quite possible that the reputation of a nationalized bank would be so impaired that it would incur even greater losses as its web of commercial dealings collapsed. These far-reaching commitments are a reason that the F.D.I.C. model of rapid shutdowns cannot be applied so easily here.

The most obvious problem with nationalization is the risk of contagion. If the government wipes out equity holders at some banks, why would investors want to put money into healthier but still marginal institutions? A small number of planned nationalizations could thus lead to a much larger number of undesired nationalizations.

Read the whole thing. I'd been waiting for someone who could explain this better than the meandering mute, Tim Geithner. Free Exchange adds:

I actually think [Cowen] misses the boat on nationalisation. He overestimates, in my view, the logistical challenges and omits the biggest threatthat foisting losses onto creditors of the nationalised bank could spark another financial meltdown.