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Nationalisation is not a solution

by Martin Thu Jan 22nd, 2009 at 08:52:24 PM EST

Instead of muddling lots of comments in the ongoing (?) discussions in the 'Nationalisation is the solution diary, I will write here in a more consistent text'

How does it come, that anybody thinks, there should be a nationalisation? Some people argue, that the banks fail to do their job to lend money out. After nationalisation, the gov't could force the banks to resume lending.
But how are those banks gonna do that? Are the patterns of lending, in which they engaged in the past really what we want them to do in the future?

I think NO.


Most lending of banks was either to corporations or to private people. Lets first have a closer look on the corporations:

Corporations have various ways to finance themselves, that have different forms and degrees of priority to pay for, one is credit, another is equity and various mixed forms.
Credit usually means a fixed payment and is most oftenly negotiated for a limited time. When the company comes into trouble and has to roll over credit, usually the conditions under which the company can refinance itself with credit get worse. All equity of the company has to be used to service the credit debt, so risk of losses is small as long as the company does fairly well.
Equity is the other extreme. Its valuation has strong variations, it will be wiped out before the credit, but the returns are quite better than for credit. Another big bonus is, that equity usually means, you own the company, you can name the CEO, etc.
At least to some degree in the last years companies - especially banks, but by far not only - tried to reduce the (expensive) equity with the cheaper credit. When volatility of earnings was low and the direction of earnings was only up, there was no reason to bother with a huge equity buffer, that helps the company in tough times, and reduces the money you can make for the (remaining) owners or as bonuses for your top management.
I think this crisis has shown that the attempts to kill the business cycle once and for all with hyper aggressive rate cuts by the central banks doesn't work. The equity ratios are inadequate. Therefore corporations need much more than bank credits more equity like methods of financing, that reduce their cost when the company gets into trouble. The gov't could use its money therefore as good by buying into non financial companies as into the banks, and this would solve another problem, about which I'll speak later.

While there maybe some reason to make banks to relend to corporations, there is no really good reason, why banks should be made to relend to people? The trouble came, because people had unsustainable consumption patterns. To make the banks to resuming to lend to private people will just shift the problem a couple of years into the future. There are two obvious solutions to this problem, none that involves the banks:

  • people can change their consumption patterns (my favourite)
  • instead of lending, the money could be transfered from those who have the money to those who want to spend it. So to say, the money stream would be the same, but without the promise to reverse the stream later. Cross country this might be difficult, but there I don't want even more state owned banks sinking tax payers money in the US. Inside countries, well a commy might get an idea with this picture of cummulated wealth distribution divided in deciles: (for Germany, but other countries look similar)

Then what are the reasons banks didn't lend, event after they were recapitalised? The most obvious answer: The fast deterioting economy makes companies less credit worthy. And after the bankers have proven incompetent in their risk management, isn't it reasonable to be careful? The banks would do a bad job, if they would lend to bad risk companies. Doing their job properly means NOT to lend right now, when they have anyhow enough assets in the books and expensive borrowing conditions (and if any normal gov't is guaranteeing all borrowing of all banks, the result will probably be high rates for that gov't, too).
Ok, the banks can charge appropriate rates for higher risks. But a) that higher rates themselves can (and usually do) cause more bankruptcies than otherwise, and b) the only reason to recapitalise banks and not directly the companies that want the credit from the banks is the leverage of the bank (recapitalise with 1, get lending to corporations of 20). But risky credits can't be leveraged very high. But then there is nothing wrong with getting a share in the non-financial corporations and influence THEIR business strategety (e.g. make car companies to build cars, that live long; or make the food companies to use less drugs, or whatever you want fromt he branch you think is worth to rescue)

Of course at all banks, that get any assistance, the stock holders should get wiped out. But not doing that won't do much damage. Instead of that changing the insolvency laws in a way, that bondholders of the bank can get some hair cut, obligations to the management (in form of already promised, but not yet payed bonuses and 'wages') don't have to be honoured, will be enough to keep the financial system from collapsing. A bank insolvency will be much cheaper then, than when you guarantee all of its debt. Of course that way banks will try to stay out of gov't help as long as possible. But that is irrelevant, because either

  • we recapitalise the winners, not the losers: the state helps those banks that survived among least scathed to get big enough to fulfill the role of the former bank champions
  • we set up entirely new banks (in Germany the KfW could play a much larger role)
This leads as well to the bad bank(s) solution, by creating a good bank you have at least one good bank and lots of bad banks (most of the others)

In the end a special for Germany; some public banks are run even much much worse than the private banks. No bank without state influence was hit as hard as some Landesbanken or the IKB. The Commerzbank needed public money mostly because of the merger with Dresdner, into which it was talked by politicians, that wanted to create a second 'national champion' in Germany. Otherwise perhaps some Chinese would have bought Dresdner from Allianz recently.
As well the biggest German bank, Deutsche Bank, was influenced by the gov't to take the Postbank, that was held by the largely state owned Post before - and of course it turned out Deutsche couldn't pay for the Postbank without some help. But there seems to be a desire to create huge STAMOCAP (state monopoly capitalism) corporations in Germany, but as state ownership is disliked as well, keep those monsters private. However, Ackermann, probably one of the more anti-state-influence guys in the bizz, manouvered his Deutsche fairly well through the storm.
Hypo Real Estate, another private bank, that needed state help, had a maturity mismatch on the balance sheet and relies on cheap funding. So despite the huge sums, a minor problem compared to the Landesbanken, that have the largest chunk of the nearly 70000 Euro per Icelandic capita, that German banks lent to this nearly bankcrupt island. They can wait until hell freezes over, to see their money back.

Ok, I think the length of the diary is sufficient to have it as diary instead as just another comment ;-)

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But most people seem comfortable with the nationalization of utilities like roads, electricity, water, unemployment, health care, etc. Isn't banking a utility too?
by asdf on Fri Jan 23rd, 2009 at 12:39:24 AM EST
I have never heard, that in the last decades anything of this was nationalised.

There is enough intransparency, that nationalisation of banks would likely be a windfall for at least bond holders of the bank and the top management, because you can't abolish liabilities of the banks, unless they are defaulting in a state ruled by the law.
I have already before written who I think were the main profiteers of the past banking industry inflation.

You can however create new banks and let those other banks vegetate until they either default or overcome the mess. It may be difficult for a new bank, to jump in everywhere, where the old banks were before. But there is no need for it, because banking has to shrink dramatically. We should stop playing capitalism as a Ponzi chain letter, build on ever more debt relative to the economic output.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Fri Jan 23rd, 2009 at 02:14:58 PM EST
[ Parent ]
... an impediment, provided that the nationalization is part of the bankruptcy proceedings:
There is enough intransparency, that nationalisation of banks would likely be a windfall for at least bond holders of the bank and the top management, because you can't abolish liabilities of the banks, unless they are defaulting in a state ruled by the law.

The banks that would require nationalization are those that are insolvent, and if they are insolvent, then a careful look at their books will show that they have not right to continue trading as a going concern.

We avoid the close look at the books because we are afraid of the bank failure, but if it is only the bank common stock getting wiped out, senior management getting sacked, and a pro-rata loss of value of the bank's bonds, then that is a company failure like any other ...

... that is, as long as the bank's account liabilities continue to be honored, we are protected from a melt-down of the monetary system, and if we are protected from a melt-down of the monetary system, then we can, indeed, take a close look at the books, and shut down those corporations that are trading while insolvent before they do any more damage.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 24th, 2009 at 07:46:46 AM EST
[ Parent ]
I don't think you are addressing the problem: right now banks are boycotting state monetary policy. They are following with a policy of their own draining the economy out of liquidity (decreasing money velocity). Even in spite of the movements by the Eurozone governments, that turned the Euribor around, banks simply keep the economy at check by increasing spread rates.

I think this crisis has shown that the attempts to kill the business cycle once and for all with hyper aggressive rate cuts by the central banks doesn't work.

IMHO it doesn't. Abstracting from present physical constraints to growth, if banks are preventing the low interest rate policies from becoming effective, you can't take such conclusions.

As a side note, the largest banks in Portugal have been state owned since the XIX century. Encompassing periods of Monarchy, Fascism and Democratic Republic, their market dominance and profitability prevailed. Gathered today in a single institution - Caixa Geral de Depósitos - it has about one third of the banking market and was the most profitable bank in the country up until the sub-prime stuff hit.

Right after the September turmoil, the state bank became a safe heaven for depositors, receiving several million euros daily in new accounts throughout October and November. Solving the lending problems here would be easy by forcing this bank to lower spread rates.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Jan 23rd, 2009 at 03:59:09 AM EST
if banks are preventing the low interest rate policies from becoming effective, you can't take such conclusions.

If banks would have done that, we wouldn't have a problem now. And banks do pass the low rates. Their lending rates are very roughly:
risk free rate (currently  ca. 0%) + risk premium (currently huge)

Only the first is set by official policy. The other isn't. Maybe there is another low rate/low default risk equilibrium, but probably only if the whole economy gets the cheap financing, and even then I wouldn't be sure. But even to try it is unreasonable for a bank.
If the state uses its money to to shift that equilibrium, it is not clear to me, that recapitalising  the banks is the most effective.
Even nationalised banks will have to comply e.g. with their working contracts, paying millions to useless employees, keeping an inflated financial industry running. The financial industry has to shrink, probably not only in the anglo countries, but as well elsewhere.

As a side note, the largest banks in Portugal have been state owned since the XIX century...

So why nationalise the rest of the banks. Can't the already state owned bank do the job the bankers think banks are necessary for? Why guarantee all the baggage. Even the countries that do not have state banks, could nationalise ONE bank, recapitalise it and let the other banks be bad banks.

The US has done it that way in the first step, for not buying out other countries. Otherwise the US gov't would have bailed out already the home owners instead of the banks that take the losses from the defaulting home owners. But the prospect, that lots of losses would occur elsewhere was nice for them. Or do you seriously think, those stakes in the banks will ever pay back?

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Fri Jan 23rd, 2009 at 01:07:12 PM EST
[ Parent ]
If banks would have done that, we wouldn't have a problem now. And banks do pass the low rates. Their lending rates are very roughly:
risk free rate (currently  ca. 0%) + risk premium (currently huge)

Do you mean that banks are following central bank policies and that's precisely why we have a problem? I don't follow you here. The data is very clear showing the difference between Euribor and the end rates payed by costumers. Also mind that if that was the case we would have paper currencies falling against commodities and not going up (velocity and supply would both be rising).

I pretty much agree with you in your final comment. As I noted previously, in our case we don't really need to nationalize private banks to get liquidity back, all it's needed is to enforce low rate premia at the state bank. That won't happen lightly for traditionally the only direct intervention government has on the bank is the board nomination.

Then again, this tactic doesn't guarantee deposits by itself.

In my view your last comment pretty much obliterates your previous comment and more broadly the thesis you put forward with this essay.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Jan 23rd, 2009 at 01:24:36 PM EST
[ Parent ]
The data is very clear showing the difference between Euribor and the end rates payed by costumers.

And how do you know, that the banks don't think that customers should pay a risk premium higher than those banks, to which they lend, that determines the Euribor?

Do you mean that banks are following central bank policies and that's precisely why we have a problem?

The reason why following central banks created a problem is not NOW, but before, mostly up to 2006. I do think that after the bust of the .com bubble, the central banks kept rates too low too long, which created an environment of strongly increasing asset values and corresponding expectations, that perpetuated the process (as asset prices can go up without fundamental changes, just when people believe they will go up). Once you are at that point, it is very difficult to stop it.
One side effect of that (or maybe the intended effect), was, that people and businesses were willing to pile up debt, creating a highly unstable situation. Then some small disturbance, may bring the system over the tipping point, where lenders start to want their money back, because they doubt the long term financial health of their debtors. This process is as well self enforcing, because the worse refinancing conditions enforce more defaults. The lowering of the risk free official rate doesn't make borrowing really cheap any more at this point, because the rates demanded by banks are not dominated by the risk free rate, but by the risk premium.

I see the need of the existence of some banks, but much less, than there are.
The key to the solution of the current crisis is not making banks to lend as previous, but to make banking less necessary.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Fri Jan 23rd, 2009 at 01:51:28 PM EST
[ Parent ]
Well, in the diary I advocate essentially, doing the equivalent of rescuing already the homeowners.
That would be as cheap as rescuing the banks, and could have some other nice features.

Even in the US this perhaps would have worked. There are about 10 Million home owners in trouble. About 1 trillion $ were spend to rescue the banks. With 100000 $ cash, probably most home owners could avoid any trouble.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Fri Jan 23rd, 2009 at 01:58:48 PM EST
[ Parent ]
The money should be issued as vouchers, redeemable by the first lender who would then toss it down the line to all the slices. That would have a double resolvency action: houses saved and liquidity injected.

You can't be me, I'm taken
by Sven Triloqvist on Fri Jan 23rd, 2009 at 02:07:14 PM EST
[ Parent ]
You are so right. Quick~! Where's my time machine?

And, I will need a great powerpoint document to show to all those who made the wrong decisions and gave free bail-out money to the people who caused the problem (and probably the solution) in the first place.

Oh, and a super-incredibly great powerpoint doc on ethics and society, the needs of the many and so forth. You think that it will be so good that those 10% with 60% of the assets will allow 20% of their assets to those 50% who only have 0% of the assets?

How about a 'rousing round of Kumbaya, at least?

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sat Jan 24th, 2009 at 11:57:45 AM EST
[ Parent ]
The case that you are making seems to be that the banks are not quite as essential as many bankers like to claim; that the government can and should cut out these middlemen and directly save the real, stuff-producing industries that are essential, and then allow banks to sink or swim.

I think that's a good idea in principle. But it would mean going back on a lot of already granted guarantees. Many governments have already de facto taken on many bank liabilities by guaranteeing their debts. In that context, the governments would have to either repudiate those guarantees that covered bad debt or take direct control of the banks' assets - anything else is just a handout to the current shareholders and management.

And I'm not quite sure what would happen if you started rolling back the already given government guarantees. The hot money might panic and pull an East Asia on us. So you'd need to corral in the hot money with capital controls first (and preferably then proceed to take it away from the gamblers who have it right now).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 23rd, 2009 at 05:28:28 AM EST
Hum ... let the banks sink and nationalize the remainder of the economy?

luis_de_sousa@mastodon.social
by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Jan 23rd, 2009 at 06:10:20 AM EST
[ Parent ]
I don't think that already most of the banks debt is guaranteed. There are full guarantees for deposits, not for the bonds, at least not in all countries. Guaranteeing the bonds on face value would be a huge give away for the bond owners.


Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Fri Jan 23rd, 2009 at 01:14:38 PM EST
[ Parent ]
most policies over the several past months have been targetted at protecting bondholders from losses, and management from consequences of their past actions. Shareholders have been mostly wiped out already.

The one exception is the Lehman bankruptcy, and this one is now widely seen by the Villagers as the biggest mistake that was made.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Jan 23rd, 2009 at 02:48:15 PM EST
[ Parent ]
Yes, but therefore nationalisation will nearly only amplify the current way, except making banks to lend without them having actually the capital to do so.

Btw. when shall overdebted consumers and undercapitalised enterprises start to get out of debt? Isn't overreliance on debt one symptom of the anglo disease? I wonder re:Krugman et al. WHEN will be the time to stop that fast accumulation of debt?

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Fri Jan 23rd, 2009 at 08:15:35 PM EST
[ Parent ]
that the problem was too much debt - and what the banks are doing is indeed to reduce debt levels overall. The problem is that they are doing it too brutally, and cutting off companies that should not be (and would not be in normal times, when the goal was to build up sound assets rather than get rid of any asset, as now).

We have to deal with the fact that there is too much debt around. The long term goal should be to reduce it, but the short term one should be that it be done in an orderly way, and only the government can coordinate that.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 24th, 2009 at 07:16:37 AM EST
[ Parent ]
Just some 20-30 years ago, most energy, transportation, communication, banking utilities were largely national in most countries. And that environment was doing just fine for many decades. As the urge for privatization got a free-wheeling ride around the globe recently, several things seem to detiorate markedly for the public. If this is not surprising neither logically nor empirically, should we continue radical "free-marketization" just because it is backed by a compact theory-ideology?

It is quite ironic that the libertarian ideology needs ever more pure conditions to justify itself. Or that the capitalist system cannot stand some real-world competition from other ideologies. Wasn't capitalism doing it best when there was some "unperfect" pressure from "nationalized" entities? In the last years, libertarians got everythings they asked for, anywhere. Just as Mr Bush. But consequences are sad. Who else is to take responsibility for the current deep crisis? Will the radical libertalism have to step aside quitely with a sore face, just like Mr Bush?

by das monde on Fri Jan 23rd, 2009 at 10:26:15 PM EST
It will cost a lot, because it means to bail out bondholders and the management. And I haven't seen so far any suggestion, how one can avoid this legally, unless all banks declare insolvency.
Even those banks, that are insolvent, will be able to hide that long enough until it is unnecessary.

Especially in the UK, the impression that the gov't backs all liabilities ($ and Euro denominated to a large part) of its big banks, threatens even the credit worthyness of the gov't. In case of an insolvency, you could guarantee with some hair cut on bond holders and excessive pay.
In case of Ireland I'm not sure, but there is as well some potential that the guarantees for the banks threaten the solvency of the state.

And then you have to scale down the financial sector. I predict, that this is done totally unsufficient, when the whole financial industry is in the hands of the gov't.

And by the way. In Germany 100% public owned banks control nearly half the market (and of course I have my account at a public bank). Wiki claims Sparkassen finance to 42% medium sized enterprises, they have the most private accounts, and there are other large players with partial public ownership (even before the current mess. By now I'm not sure, if there is any bank left without a public share).
Overall the public banks in Germany have done considerable worse than those that were fully private before the current mess. If someone would take a Landesbank for 1 Euro, I would advocate even now privatisation. Unfortunately I doubt anybody would take a Landesbank even for that right now.

The muddling with the banks that we already have seen of course is not libertarian at all. It is a corporatist fusioning of state and big banks. I could as easily argue it is close to the mindset of communists as somebody can claim it would be libertarian. The redistribution of wealth to people, that neither need it, nor have earned it, occurs as well, when taking 100% stakes instead smaller shares.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Fri Jan 23rd, 2009 at 11:01:19 PM EST
[ Parent ]
Sovereigns have no obligation under international law to take on "odious" debts - e.g. debts that have been run up by colonies in the course of being plundered by their overlords, or purely fictitious debts created by accounting gimmicks to put a stranglehold on the public finances.

There are precedents. Cuba (IIRC), after one of the Spanish-American wars. Argentina, more recently. Russia also had a sovereign default in the late Yeltsin years.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 24th, 2009 at 03:18:12 AM EST
[ Parent ]
It's not a question of either Nationalisation (State ownership) or Privatisation 9ownership by a Corporation).

First, hand all the distressed Bank's shares over in trust to the employees. ie the John Lewis Partnership approach - Unions can hardly complain about that.

They then become Manager (Human Capital) member of an LLC or LLP while the existing shareholders and the government "pool" their investment as Investor (Financial Capital) members and share any net surplus (or losses) proportionally.

It's not Rocket Science.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 24th, 2009 at 12:40:18 AM EST


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