How Not To Nationalize Banks


As we’ve said, we’re strongly against bailout proposals that prop up insolvent zombie banks. Better to seize the assets, wipe out shareholders and bondholders, and quickly dispose of what remains, as Anna Schwartz told us ages ago.

That said, nationalization done wrong can be worse than no nationalization at all. 

The government should NOT be in the business of operating failed institutions. It should simply seize them, chop them up, and sell them off.

For example, Arnold Kling, writing at the Atlantic’s Business blog, argues that the urge to use government sponsored or owner banks to manipulate mortgage rates is just going to result in another financial catastrophe:

With rules and traditions in place, as in the FDIC process for dealing with failed banks, I believe that a government takeover of an insolvent institution can be handled fairly and reasonably efficiently, although never perfectly. The ad hoc process, under TARP and the various weekend-at-Bernanke’s sessions held last year, has some dangers.  In particular, the government seems inclined to follow a “hold and manage” strategy rather than a “carve up and sell quickly” strategy for dealing with troubled institutions.

For example, if you were following the FDIC process with Freddie and Fannie, you would be carving them up into bite-sized pieces and selling them off.  Instead, government is keeping them, and it is hoping to use them to reduced mortgage rates.

This is a horrible, horrible idea.  Mortgage rates are ridiculously low right now.  You can get a 30-year, fixed-rate mortgage for less than 5 per cent.  I saw what happened to the S&L industry when they were caught holding 30-year mortgages with 6 per cent interest rates in the 1970’s.  If you make a 30-year fixed-rate loan at less than 5 per cent today, then good luck to you.  

It is easy to imagine short-term interest rates over the next 30 years averaging 5 per cent or more, in which case anyone who lends at less than 5 per cent will lose money.  If rates average 10 per cent, which easily could happen given the crazy trends in fiscal policy, you would lose a fortune lending money at 5 per cent.

Politicians need to resist the ever-present temptation to “do good” by messing around with what should be private enterprises. It doesn’t work.