Brookings Reports - Bank Nationalization, Geithner Plan, A Mix Of Both? Krugman's Incomplete View

[Median Democrat]

Brookings has done a series of very informative and educational reports regarding the problems in the baking system. Interestingly, I think Brookings first report in 1/26/09 may actually provide the best preview of Obama's overall strategy. Despite Paul Krugman's rather narrow focus on nationalization as an apparent cure all, I think that Obama has demonstrated that nationalization is NOT off the table.

Indeed, the FDIC has taken over about 21 banks already in 2009, which is on pace to exceed the number of banks taken over in 2008. Thus, in sharp contrast to Krugman's rhetoric, the Obama administration HAS BEEN taking over and nationalizing banks.

The reports discuss the options available to the Obama administration, including nationalization, and with Geithner asking for additional authority to take over financial institutions, perhaps the Brookings study will prove precient, and Obama is going to take multiple approaches to addressing the bank situation.

The key assumption by Krugman is not economic, its political. Krugman thinks Obama needs to nationalize now, because he will not be able to do so politically later on. However, as the Brookings study indiates, nationalization can be and should be done as last resort after less intrusive means have been exhausted.

Brooking's Recommendations and Comparison (1/29/09):

http://www.brookings.edu/papers/2009/0129_banks_elliott.aspx

Bank Nationalization (2/25/09):

http://www.brookings.edu/papers/2009/0225_bank_nationalization_elliott.aspx

Geithner's Plan (3/23/09):

http://www.brookings.edu/papers/2009/0323_investment_program_elliott.aspx

[MarjorieG]

1. Thanks. Never felt nationalization was the whole story, or should be first step.

Especially not until knowing the health of the banks. Maybe the toxic asset plan to price and rid will provide better terms.

[PBS Poll-435]

2. Nationalization makes me queasy

:barf:


edited for the weaker-stomached among us. ;-)

[Undercurrent]

6. I'm sorry, PBS

but IMO that photo is really gross.

Maybe use this? :puke:

Please?

[PBS Poll-435]

10. Done

:-)

[Undercurrent]

14. Thank you.

[ArchieStone1]

3. The title misleadingly implies that Brookings said Krugman's view is incomplete. It is the OP's view

if I'm not mistaken, it is you who upon reading all those reports concluded that Krugman's view is incomplete.

It is also amazing that people have recommended this post without having time to read half of one of those reports.

[Median Democrat]

7. Misleading? Of Course The OP Is My View. Its My OP.

If I was simply posting an article, I would just put it in latest breaking news without comment. However, I posted the article in a discussion forum, and that OP is my original OP as is clear from the bolded text. I don't see why people think it is a good thing to simply spam articles without comment, which I personally fine objectionable in a discussion forum. What's your take?

So, the OP is only misleading if you expect a poster to spam without offering their own commentary. This is a dicussion forum. That is my take, and I back it up with several Brookings Studies that support the idea that you can pursue multiple strategies to address the banking crisis, rather than just nationalizaion.

[paulk]

4. "less intrusive"

"The key assumption by Krugman is not economic, its political. Krugman thinks Obama needs to nationalize now, because he will not be able to do so politically later on. However, as the Brookings study indiates, nationalization can be and should be done as last resort after less intrusive means have been exhausted."

What does that mean?

The Brookings Institution doesn't consider the Goverbnebt pouring billions and billions of taxpayer dollars into a rat hole "intrusive"?

[Median Democrat]

8. As the Brookings Report Notes, All Options, Including Nationalization...

Involve spending billions of dollars. Also, as the AIG bonus debacle shows, there is a danger to making banks a political entity. If the government nationalizes the bansk, there will then be tremendous political pressure to reduce the principle on mortgage assets held by the banks, which will ensure that billions of taxpayer dollars are lost.

[Kdillard]

5. Honestly I believe that if nationalization should be done we need it to

be done in an orderly fashion and with a framework in mind that looks at the complexity of the company and other related issues. I don't believe we have that yet and I do believe that is what the Obama administration is trying to work on. I agree about it being a method of last resort.

[Median Democrat]

9. The First Brookings Study Discusses Nationalization As Part of a Mixed Strategy...

...and the actions of the Obama administration show that Obama has indeed taken over several bansk this year. I believe that Krugman is out of his element when he discusses the political consequences of nationalization. For example, if the feds planned to nationalize the three weakest banks of the ten largest banks, should they announce it before they identify the three weakest banks or are ready to do it?

Of course not, because then all of the large banks would suffer as investors flee from any bank that is a potential target of nationalization. This is what I mean by exhausting less intrusive means. Nationalization is only done when the truly weak banks are identified and isolated, whcih is quietly being done as shown by the 20+ takeovers done in this year alone. For example, look at California:

http://www.latimes.com/business/la-fi-banks28-2009mar28,0,2513212.story

/snip

The FDIC, a primary regulator of many state-chartered banks as well as the guardian of federally insured deposits, has announced 10 public enforcement actions against California banks and bankers in the first two months of this year, compared with 24 in all of 2008 and no more than seven in each of the preceding three years.

/snip

[Kdillard]

12. True and I also believe that is what the stress test is all about.

I believe the last I heard it should be done sometime in April. I find it odd that no on ehas really commented on what the FDIC has been doing so far and how it fits into getting the whole mess cleared up. I am not much of a financial expert but I am going to believe by the end of this we should be on the road to stability. I am also hoping that Congress will move forward with Treasury's request and there will be a framework put forth so that we can winddown these big institutions that fail. I believe that will be the most important legislation the President will sign during his first year in office.

[Median Democrat]

20. Don't Look Now, But Mix and Match Is Being Hinted At..

Not to pat myself on the back about noting the Brookings Study, and pointing out that the Obama administration was planning to mix and match all along, but here is a post today about the banking situation on Newsweek noting that nationalization still does remain in the toolbox. This may not satisfy nationalization purists, but I do suggest looking at the first Brookings report, which has proven prophetic.

http://blog.newsweek.com/blogs/wealthofnations/archive/2009/03/30/nationalization-after-all.aspx

/snip

But Geithner and Bernanke have also hinted that the government may have to effectively take over at least a couple of major banks anyway after the ”stress tests” are completed in April. And with the TARP funds running down—Geithner is cagey about how much exactly is left-- that’s going to mean another call on a recalcitrant Congress for a lot more money

/snip

[FrenchieCat]

11. Geithner's request of new regulatory framework....

As spelled out here, the regulatory framework proposed that Geithner has requested.....

On taking over institutions:

"Depending on the circumstances, the FDIC and the Treasury would place the firm into conservatorship with the aim of returning it to private hands or a receivership that would manage the process of winding down the firm. The trustee of the conservatorship or receivership would have broad powers, including to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution's contracts (including with its employees), and to deal with a derivatives book. A conservator would also have the power to restructure the institution by, for example, replacing its board of directors and its senior officers. None of these actions would be subject to the approval of the institution's creditors or other stakeholders." (Among other things, the trustee can step in, sell or keep whatever he or she felt was best for the company, completely replace the BoD, eliminate any necessary executives, void contracts and do so without stock or debt holder approval.)

Hedge funds -(This has been a long time coming):
"U.S. law generally does not require hedge funds or other private pools of capital to register with a federal financial regulator, although some funds that trade commodity derivatives must register with the Commodity Futures Trading Commission and many funds register voluntarily with the Securities and Exchange Commission. As a result, there are no reliable, comprehensive data available to assess whether such funds individually or collectively pose a threat to financial stability. The Madoff episode is just one more reminder that, in order to protect investors, we must close gaps and weaknesses in the regulation and enforcement of broker-dealers, investment advisors and the funds they manage."

Derivatives and swaps:
"In our proposed regulatory framework, the government will regulate the markets for credit default swaps and over-the-counter derivatives for the first time."

(This is just the first part of the proposals for the swaps, the others are well worth reading.)

http://www.treas.gov/press/releases/tg72.htm

[amandabeech]

13. The FDIC has been taking over much more simple lending institutions,

not financial conglomerates. The FDIC has been doing this since the Great Depression, and I'm not sure how much input the Obama administration has in directing the FDIC to take over or not take over banks.

Citigroup et al, are financial conglomerates. Each has a banking subsidiary, but each also has many other subsidiaries like a brokerage, a mutual fund company, maybe a leasing division--you name it.

By law, the FDIC can only force the bank subsidiary into receivership. The other subsidiaries, where a good deal of the bad stuff originated, would be doing what they normally do.

Late last week, the administration announced that they were proposing legislation to allow the takeover of the conglomerates, as well as other financial organizations like AIG (no bank, but a lot of other stuff) and hedge funds.

I think that the test of whether Obama is sincere in keeping receivership, often referred to as "nationalization," as an option is how quickly the Obama team and the Congressional committees get some legislation up and running.

Until then, I think that the Obama administration's powers are limited.

[Undercurrent]

15. Exactly.

And as pointed out by Frenchie as well.

No federal entity has the power at this time to nationalize anything except banks. Many of the mega financial corporations are not simple banks. They are a hodgepodge of different financial entities. That is why Geitner is asking for legislation that would empower the administration to take over corporations that have a direct impact on the economic health of the country. Until that authority in place most of the cries for nationalization are premature.

[amandabeech]

16. I don't think that the cries are premature.

I think that the authority should have been extended with the Gramm Leach Bliley repeal of the Glass Steagall Act.

I also think that it is needed here immediately, and I hope that Obama has had some folks working on this behind the scenes since shortly after he was elected.

I also think that it is possible that Krugman, Stiglitz, Galbraith, et al were the push that Obama needed to announce this now.

So, no, I don't agree with Frenchie.

[Undercurrent]

17. The cries are premature because

no nationalization of non bank financial institutions can take place until a law is passed to allow for it. Banks are covered under the FDIC. Other financial institutions are not.

[amandabeech]

18. The fact that the remedy isn't there is the reason to call for it to be there tomorrow.

You seem to be saying that one should not call for new laws "until a law is passed to allow for it."

I do not understand your reasoning here.

[Undercurrent]

19. The voices who are calling for nationalization

don't seem to be calling for new legislation. If they were they would be addressing Congress to pass it. Instead, they are criticizing the Obama administration for not nationalizing.

The call should be for new legislation. Which is exactly what Obama has done.