During the credit crisis, we argued that temporary nationalization would be the best option to deal with financial institutions gone wild. Turns out we might have been to moderate..
Some of the reasons we offered for temporary nationalization where:
- It’s what Sweden did in the early 1990s after a similar banking implosion. That policy is generally regarded as a success.
- It’s consistent with a good old capitalist principle: “those that pay decide”
- It would have provided the bailing-out tax payer with more of the upside after the restoration of the financial industry (that’s what happened in Sweden, after working off the bad loans, the public stakes were sold at multiples of their purchasing prices)
- It would have provided more ways to let bankers face the consequences of their risky bets gone wrong (also a good capitalist principle, we think), thereby reducing the moral hazard created by the bail-out
- It would have provided way more leverage of changing bank behaviour, like excessive risk-taking and leverage, and excessive pay packages not tied to (long-term) performance
- Like China, it would have given the public sector another leverage to get credit flowing into the economy when that was most needed.
Wherever banks were properly regulated and concentrated on good old-fashioned core tasks like credit provision to households and firms, there wasn’t a financial crisis. We always argued bailed-out banks should be nationalized temporarily (like the Swedish model) and we do not generally favour Government ownership of companies (we’re no socialists).
However, that doesn’t mean there aren’t successful examples off state run banks, even in the heart of the US! Read this article for one such example. This is a well functioning bank, 100% publicly owned.
Whether it’s in public or in private ownership is actually a moot point, but where regulation has been so defunct that private banks started misbehaving (at staggering cost to society, and many activities adding no value whatsoever besides gambling), perhaps such a more permanent option might be more desirable than the alternative. Desirable enough for Washington and Hawaii to follow suit..