Is Nationalization on the National Agenda?

Now that the health of Apple’s CEO, Steve Jobs, has faded once more into the background of economic news, a new source of gossip must arise to fill the role of the source of stock market volatility. Such conversation turned to plans of nationalization of floundering banks. The word itself resonates with a nerve-racking uncertainty, enough to instill fear in both types of investors: those that understand the process, consequences, and benefits, and those who yet do not. A surprising number of people hear the word ‘nationalization,’ imagine an economy dominated and controlled by government, and acknowledge such an outlook as a complete failure of America. For a nation built upon economic freedom, this scenario is a blatant nightmare. Sensing this was a touchy subject, both President Obama and Fed chairman Bernanke have been reassuring the general public that such drastic measures would not be necessary, and conveying that simply holding a minority stake in a bank is a superior solution, as opposed to bankruptcy or seizure. It seems that investors’ suspicions are unfounded, even though it does indeed seem as though banks are running out of options. Many have actually forgotten that the topic of nationalization has already come up at the onset of the financial crash.
Needless to say, Wall Street is not a fan of this chatter. In fact, a conflict of interest becomes evident, in that any investor with any stake in a bank stock dreams of a scenario where government would just toss billions to banks with no repercussions or stipulations. However, this situation would be counterintuitive to our assumed long-term goal of restoring financial stability, which would, overall, have a more beneficial effect than merely allowing bank stocks to minimally survive and scrape along the bottom. During nationalization, shareholders are given an offer they can’t refuse: the FDIC will pay each one a whopping $0.00 per share. Furthermore, the bank loses its executives and operates under complete governmental control, which contradicts our current motions of mere investment in a bank’s future. Why would such a course be considered as a viable solution?
As one example, consider the case of Sweden during the 1980’s. The nation’s collapse commenced in a shockingly familiar fashion; financial deregulation increased real estate lending without regard for the value of collateral, which could not maintain its ascension indefinitely. At one point, interest rates hit a mind-numbing 500%. In 1992, Sweden’s entire banking sector was nationalized, and absorbed into the governmental realm. All deposits were guaranteed, confidence in safety boomed, and the government had a direct stake in the success of each bank. When the economy had demonstrated a sufficient recovery, the majority of the banks were re-privatized, through which the government was able to salvage the bulk of its initial nationalization effort, and minimize net change in the deficit. Admittedly, a large cushion of capital is necessary to privatize each institution, and it is the government’s responsibility to generate those profits—a task federal administration is not accustomed to performing.
Clearly, nationalization can work as a viable solution to our financial crisis, but only if such strategies are imposed quickly. At this point, our banks are worth very little, and the government has already invested billions of dollars to keep them afloat—an effort which, though unorthodox and possibly inadequate, should not be wasted. Though I am a strong believer in the ability of markets to restructure themselves, nationalization may have been a feasible opportunity if applied early, but having come thus far, we’ve most certainly missed the boat. Given that our government is so averse to the concept, and substantial efforts have forced a massive bailout plan into action, the entire notion is effectively inapplicable.