Ryan Lizza on Larry Summers
The New Yorker writer changes minds retrospectively on the bank nationalization debate
Bloggers have been warring over bank nationalization since last fall. New contributions, recently, have been few and far between. But every now and then a debate-shifting piece comes along that forces fierce foes to reconsider their positions. Ryan Lizza's Larry Summers profile in the New Yorker appears to have done just that. Several prominent pro-nationalization bloggers--including Reuters's Felix Salmon and The New Republic's Noam Schieber--have taken this opportunity to admit that the Obama administration did well to avoid taking over the nation's ailing banks. Even those who have not found the account convincing have felt compelled to comment. The Wire covers those responses elsewhere. Here's the material that provoked this response:
First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent ... Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden ... Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe--interest rates had reached a hundred per cent--that there were no other options ... Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.
… Most of the nineteen banks were able raise money privately. "It worked," the Treasury official said. "People had money to put into banks. The nationalization crowd would have had the government putting all that money in." On the day the results of the stress tests were released, Geithner met with the President. He smiled and handed Obama the first page of a report from Bridgewater Associates, a private investment firm that had consistently taken a dim view of Treasury’s plans. The report was headlined "We Agree!"
... So far, none of the worst fears of those who believed that the stimulus was too small or that nationalization was the only option or that taking over car companies would destroy the fabric of capitalism have materialized.