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Amy Traub

The N Word

I understand that President Obama doesn’t want to get started on Day 1 nationalizing the nation’s banking system. But realistically that looks like where we may be headed.

There are good reasons to be wary of nationalization. In the first place, it would be extraordinarily costly, although virtually any option for coping with failing banks looks to be expensive. Temporarily government-run banks would also need to be carefully insulated from political pressures, although there's evidence that the TARP process in place now is already vulnerable to these pressures. And the very transparency of nationalization makes it more politically risky than plans to subsidize failing banks through more obscure means with less taxpayer benefit, as Paul Krugman gloomily predicts the administration will do.

Yet, as Felix Salmon at explains, under virtually any scenario for dealing with banks that are too big to fail “the government is taking virtually unlimited downside, [so] it should by all rights have all the upside as well – i.e., ownership.”

“America isn’t about widespread nationalization” protests New York Times financial columnist Andrew Ross Sorkin. But if, as Obama averred in his State of the Union address, “the ground has shifted” and the new administration is focused now on what works rather than stale political arguments about the role of government, then when confronted with this massive case of market failure we should get over our fear of the N word and put a public takeover of insolvent banks under serious consideration. The reasons not to nationalize may still outweigh the rationale for taking the plunge. But the nationalization option should be publicly on the table.

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Posted at 1:24 PM, Jan 22, 2009 in Banking
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