Nationalizing banks
In the United States, the Bush administration is preparing to spend about $250 billion to buy equity shares in nine large financial companies, as well as perhaps equity stakes in thousands of smaller banks. This will come from the $700 billion bailout package Congress recently approved and the nearly unilateral power it gave Treasury Secretary Henry Paulson to tinker.
Many Americans are watching in stunned silence, wondering how the world's largest free-market economy, headed by a Republican president, could come to this so quickly. Count us in this group, too.
Paulson made this move as broad as possible so as to avoid having the government pick winners and losers among banks. Some banks were said to be resentful and resistent. But, even though the banks are encouraged to buy back the government's shares as quickly as possible, there is no way for the government to do this without rewarding risky behavior. That could have long-term consequences.
When the markets surged in response to this, some analysts were quoted as saying the tough times were over and the bulls were out again on Wall Street. In fact, the Depression lasted at least seven more years, due in large measure to more meddling in the free market from Washington, which made investors uncertain and afraid.
To recap what has happened so far in 2008, the Federal Reserve offered the mortgage market $400 billion in loans back in March; underwrote the sale of Bear Stearns with $29 billion in guarantees; pledged $200 billion to keep Freddie Mac and Fannie Mae from going under; let Lehman Brothers collapse; and helped AIG to the tune of $85 billion. On top of this, Congress and the president approved the $700 billion bailout (with $110 billion in needless pork added on top).
None of these has solved the problem. Nor is Monday's surge likely to be the end of rough times on Wall Street.
The debacles of the 1930s offer many lessons. Perhaps the biggest is that there is a time for government to step in and a time for it to step out. Also, there are proper and improper ways for government to help.
Someone in power needs to come to the defense of capitalism and to remind people who should know better that markets, like rivers of water, will carry on no matter how people try to erect barriers or diversions. The administration should explain how it plans to divest itself of bank shares quickly.
Someone also should explain how the nationalization of struggling banks won't lead to moral hazards by setting a precedent that encourages risky behavior.
Recent comments
are we just going to let all of this blow over without sending someone…
Anonymous | Oct. 15, 2008 at 9:39 p.m.
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