Real Capitalists Nationalize
Brad DeLong made my day:
Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.
It might work like this. Congress:
grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship
requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent (paying off in full or not paying off in full the liabilities of the firm at its discretion), unless the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury
requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again.
In addition, Congress:
grants the Treasury the power to issue up to $500 billion of troubled asset redemption bonds, the proceeds of which are then to be loaned to the Federal Reserve to be used to cover the liabilities of those liquidated firms that the Federal Reserve judges it is in the interest of the taxpayer to have their liabilities paid off in full.
...It's time for the Democrats to pass a nationalization in the taxpayers' interest bill and dare Bush to veto it.
There's a beautiful irony here. The superficially private-sector-friendly Paulson Plan is likely to entail socializing losses and undermining the incentives that give capitalism its efficacy and its legitimacy. Outright nationalization, on the other hand, may look like a Commie statist plot, but strengthens the "invisible hand" in the long run, as long as the nationalization is temporary.
To understand the paradox, go back to Zingales' excellent essay. Under ordinary circumstances, when firms can't manage their debt, Chapter 11 reorganization is an excellent means of preserving market discipline while preserving the "going concern" value of the enterprise. Unfortunately, bankruptcy is a slow and uncertain process. In the current crisis, the insolvent enterprises are so large, numerous, and interconnected that financial markets might self-destruct if we "let nature taking its course".
Temporary nationalization could serve as a kind of fast-track bankruptcy. Creditors, counterparties, and customers would have some certainty that firms in conservatorship would continue to function, and most could expect to be made whole (although the state could and should force haircuts or debt-to-equity conversions on the some junior claimants). Stockholders and incumbent management would be unceremoniously booted from nationalized firms, creating a strong incentive for companies to avoid the state's tender mericies if at all possible.
Besides reassuring counterparties, nationalization provides an opportunity for the government to restructure firms prior to reprivatization with an eye towards reducing systemic risk. "Too big to fail" firms can be sold off in pieces, rather than merged into superbehemoths with a government-arranged subsidy, as is the current fashion.
Of course, nationalization does represent a "taking" by the government of private sector assets. The salutary effect with respect to market discipline has to be weighed against a corrosive effect on property rights. But if the terms under which firms can be nationalized are reasonable and carefully spelled out, especially if nationalizations generally occur where firms otherwise would have fallen into bankruptcy, the harm to property rights would be minimal. Also, procedures and timetables for reprivatizing or liquidating nationalized enterprises would have to be built into the plan.
Nationalization is a hard sell politically. Small-government, free-market types naturally have a problem with the Feds coming in and taking over stuff. But counterintuitive though it may be, overt nationalization is more consistent with the principles of a free market than covert government subsidy. Real capitalists nationalize.
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This article has 9 comments:
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maelstrom
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75 Comments
Sep 27 11:40 AM-
1 world currency
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297 Comments
Sep 27 12:30 PM-
H.J. Huneycutt
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122 Comments
Sep 27 01:32 PM-
constructe
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369 Comments
Sep 27 02:56 PM-
The Realist
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42 Comments
Sep 27 04:33 PMThat might be the dumbest comment I have seen. Check you facts, Bush and the democrats are ready to pass this bill regardless of what it does. It is the republicans who are the ones stopping this right now. The Democrats can pass any bill they want, they have the majority and Bush's support, so why don't they? Because they know that the country will blame them for passing a horrible bill.
The current bill is just a pay off to bankers and increase government power. If anyone thinks for a moment that is not what the democrats want to do then you are nuts. These people being bailed out are the democrats largest contributors. If you take a second to look at the red/blue stats for NY you will find that while most of the state is red the largest blue area with all the votes in the state is NYC and its surrounding suburbs, all represented by rich bankers. This works perfect for them and Bush as he is an idiot that listens to Paulson who just wants to pay off his friends.
I do like the plan as DeLong sets it out in that it makes the equity and debt holders pay for their mistakes. Those are the real people who need to pay, they did the investing, they took the risk. The original Bush/Dodd/Frank plan would have taken that risk and passed it on to the taxpayer. The bill passed must include that any bank that takes assistance also has its shareholders and bondholders pay for that help.
Everyone who is against the current bailout as originally outlined needs to thank their republican house members who are the ones that held this up. The rank and file has been flooding them with phone calls, faxes and emails and it is working. We can accept a bailout only if it punished those responsible, not the taxpayer.
And while we are on it, what is up with the JPM/WM deal. Did the government just give WM's good parts to JPM for @1.8 bil and let the bondholders eat all the losses. JPM must pay the real price for WM's good assets, it does not sound like they did that here. So the feds let JPM get a steal on WM's good assets and that is money that comes directly from the bondholders. Now don't get me wrong, the bondholders should lose whatever they have lost, but increasing that loss so JPM could get a $10bil asset for $1.8 bil is a joke. All it does is make sure these banks don't do deals until the next one collapses.
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steveballmer
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156 Comments
My Website
Sep 28 12:04 AM-
Duude
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105 Comments
Sep 28 04:13 AMOn top of the $700 billion, there are some goodies for democrats too.
This isn't small either, its huge.
The provisions they added take 20% of any profits from each and every troubled asset bought by the government and send it to two organizations ACORN and La Raza. That's very different from 20% of overall profits. We can lose money overall, yet we will still fund this pork with 20% of any profit from any single transaction.
These organizations have been tagged by democrats as housing assistance groups for low income families. In reality, ACORN has been partnering up with banks that have been offering low income families the same sub-prime mortgages and alt-a loans that both congress and ACORN have been screaming about. Ironic, ain't it? Only in Washington does this crap happen. Acorn is involved in other things unrelated to mortgages. In fact, I would say its their primary business. Acorn registers poor people as democrats. They've been in the news a number of times over the last decade. They've exhibited a continuing pattern of registering phony voters. They've attempted to register tens of thousands over the last 5 election cycles. They have always defused their scandals by claiming that its always an isolated incident by some rogue employee. Incidentally, Barack Obama is a former trainer under ACORN. He is now their senator.
The other group is La Raza. Like ACORN, they characterize their own organization as one that helps the poor. Unfortunately, they have also been breaking the law on a regular basis. La Raza has been offering illegal aliens assistance in avoiding the INS. They also are involved in registering voters. These two groups would surely not be included if voters were apprised of the situation. $700 billion is bad enough without Congress directing profits to voter registration drives.
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whisperonthewind
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232 Comments
Sep 28 08:33 AM-
Makes Sense
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10 Comments
Sep 28 04:14 PM