Were We Right Not To Nationalize Banks?

An in-depth account of the decision not to nationalize banks has convinced a few skeptics that the administration was right

Economists and business bloggers can't get enough of Ryan Lizza's massive New Yorker profile of Larry Summers. The piece provides an in-depth look at the administration's debates over recession predictions and stimulus tactics, but that's not the part that has grabbed everyone's attention. It's the part that revisits the decision not to nationalize banks.

Roughly a year ago, many economists (particularly on the left) were calling for the government to take over ailing banks instead of merely bailing them out. That path did not prevail, but some econopundits held onto nationalization as the better choice. But now, some are reconsidering. Lizza's insider description of the Obama administration's debates over nationalization has convinced some former advocates that they were wrong. Others still refuse to budge, arguing that nationalization would have left us better off. Here's the best reaction:

• Summers Was Right and I Was Wrong Reuters's Felix Salmon concedes the nationalization debate, "[i]n hindsight," to Summers on behalf of himself, Paul Krugman, and Nouriel Roubini--the pro-nationalization contingent. Also, he's delighted about the debate that Lizza reports took place in the White House over the matter, "between people who had no ideological axe to grind and who were intent on working out the objectively right thing to do." He calls the entire administrative handling of the affair "extremely professional and effective."
  

• Fair Enough The American Prospect's Tim Fernholz seems to find Tim Geithner's defense of his controversial policies reasonable, and adds that "[l]ast winter, a lot of advocates of a more direct government role did themselves a disservice by failing to explain specifically what the mechanics of such a move would be." As a result, "[t]here was never a real answer to the 'how' question."

• Consider Me Converted  The New Republic's Noam Scheiber writes, reading the piece, that "[y]ou simply cannot talk to these guys and not appreciate how much some of them wanted to be more aggressive with the banks at various points ...but realized they couldn't in good conscience recommend that course to the president." Scheiber's persuaded: "they were right. (For what it's worth, I say this as someone who initially supported nationalization.)

• Not Buying It Think Progress blogger Matt Yglesias thinks "Felix Salmon and Tim Fernholz are both unduly impressed by the arguments presented ... as to why the administration was right to reject bank nationalization." For instance, Yglesias finds Summers's argument that Sweden had only nationalized its banks after two and a half years of wrangling, and that it seemed "a strategy that governments turn to only after it is very clear that nothing else can work," a bit "frivolous": "Yes, Sweden did this as a last resort. And it worked. Which is why it was being suggested that we not wait through a grinding two-and-half-year financial crisis before employing the remedy."
  

• They Were Wrong, and the New Yorker is Wrong, Too  Dean Baker at The American Prospect remains singularly unconvinced. "yeah, Citigroup is doing just great," he writes in response to Summers' declaration that "the banks with combined commercial and investment operations fared the best." He particularly objects to Lizza's conclusion at the end of the article:
  

Finally, we are told ... that: "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."

Sorry, but this is wrong, big time. The worst fears of some of us who said that the stimulus was too small were that we would be sitting around with 10 percent unemployment for a long period of time and that stimulus would be discredited. That pretty well describes the world we live in, even that may not be the case in New Yorker land.

• Didn't Exactly Work, Did It? The New York Times's Paul Krugman, a nationalization advocate whom the article acknowledged had been something of a thorn in the administration's side, was fairly critical: "it does not sound, from the Lizza article, as if either the economic team or the political team thought much about the risks of finding themselves where we are now--with the economy still failing to deliver job growth despite the stimulus-- even though those risks were completely apparent at the time."

• One Thing's Clear: Obama's No Socialist Conor Friedersdorf doesn't take an explicit stance on nationalization, but writes at The American Scene that "[o]n reading the piece ... one can't help but reflect on the wrongheadedness of those who insist that the Obama Administration is motivated by a desire to turn the country socialist."
  

• I'm Just Not Sure "Nationalization," writes the Washington Post's Ezra Klein, "is the only major policy issue I've ever written about that I never felt able to take a position on." He seems to find the Obama administration's course of action acceptable, however: "The argument isn't that a perfectly executed nationalization couldn't have left us in a better place. It's just that we're in a relatively acceptable place ... and we got there without risking the downsides of a botched nationalization."