Ask the Editors: Four Problems With Bank Nationalization

I'll post a few more tomorrow, but here's one for now. JohnGalt asks:

What's wrong with nationalization?

I have the impression that the people most opposed to it are not the middle/poor class but the business elite. [...] Anything else?

Yes! In particular, four objections tend to pop up:



1. The big problem is the risk of contagion: It might be difficult to limit nationalization to only a couple of banks. If the government wipes out the shareholders of a few insolvent institutions, it will reduce the incentive for private capital to flow into banks that are wobbling but still upright. (Why invest in such institutions if the government can just come in and wipe you out?) Nationalizing a couple of banks might set off a reaction that will require nationalizing many more.

On top of that, there are a few other worries about nationalization. I have trouble knowing how much weight to give to each of these arguments. But here they are:

2. There is little historical precedent for large-scale nationalization. (And while lack of precedent isn't really an argument against anything, it suggests that we should approach the issue with skepticism and humility.)

3. Taking over multiple banks will present the government with a very complicated management problem. The degree to which this worries you will probably track the degree to which you trust government managers to be competent, accountable, etc.

4. There is the risk that political pressure will taint the market for loanable funds. (And even if actual political pressure doesn't enter the picture, the perception of political pressure almost certainly will.)