The Case for Nationalization

This has been a very difficult week for the Obama administration. The Geithner/Summers’ economic plan, mid-way from being implemented, has come under a half-sensical attack. On one side, Republicans have unitedly opposed it as a crazy spending spree with a socialist agenda, while a vast majority of economists, many now working for Team Obama, still think it is not enough to stimulate and grow the economy. Aside from a lack of bipartisan support in Washington, many economists and analysts now believe that the real cancer of this recession lies in the banking system, and if left to its own devices, it will burn through the recovery money like gambling junkies in a casino.

Take for instance the largest banks in the US: Wells Fargo, J. P. Morgan Chase, Citibank, Bank of America and HSBC. Economists and anyone out there in their right mind know that at this point, even if questions of fairness are raised at the notion that we are feeding the capitalist canker we are trying to eradicate, the government cannot allow these giants to fail. Why? Because the cost would be unthinkable and more damaging to consumers, investors, taxpayers and ultimately the American economy. So what is Obama to do? He should carefully consider plans to temporarily nationalize the banks, by breaking them into manageable sizes. By buying their toxic assets and controlling the freefall of their stocks and the increase in net-loss derivatives he can more easily restore lending. Capping CEO pay and re-establishing some regulations is a good start, but it is not enough to restore consumer confidence.

Last year, when the Bush administration bailed out the banks the first time, the purpose of the bailout was to free up credit and allow for banks to beef up their vaults. However, instead of taking the money to address their liquidity problems, they went out on a shopping spree. Wells Fargo acquired Wachovia, J.P. Morgan bought Washington Mutual and Bank of America seized Merrill Lynch. Is there something wrong with this picture? Absolutely. These bailouts left out the government’s conditions and specifications to interpretation. This time, the Obama administration has to be stricter. How about creating a banking czar? Republicans will never agree to this, even if they cannot put together one sound economic policy and present it to the American people. But the alternative is bleaker: throwing money at the banking industry without some strings attached can make Obama seem like an appeaser, not a reformer.

Even if the American people are willing to turn a cold shoulder to Republican criticism because of their lack of better and interesting ideas, time is of the essence if the Administration is to push for a bigger, bolder and desperately needed banking rescue. Unemployment is at a 25-year high, consumer spending has been at a record low, foreign investment has dried up, and confidence is running out in the financial markets. The American people should understand that the only way to erase these assets from the balance sheets is by buying up shares. At the end, the public should realize that they are the only ones that stand to gain.