Progressive Principles for Nationalization

Champion “nationalization” if you want, but there are such things as “good” nationalization and “bad” nationalization. The definition of which is which depends on the point of view of the stakeholders. So what kind of “nationalization”—or government ownership scheme—should we be calling for as progressives and taxpayers?

Here are three principles that I think make sense for us to demand:

1. Regulation of financial institutions' practices, including underwriting and securities selling, needs to come first, before any subsidies, bailouts or incentives are dished out. Otherwise we set ourselves up for a repeat of the Enron debacle.

Recall how partial deregulation of the energy sector in California ended up being a horrific nightmare for the consumers and taxpayers and a windfall for Enron, who exploited gaps in the government's involvement in the sector? The failures at mortgage giants Fannie Mae and Freddie Mac reflect the same problem in partial government intervention; in this case our giving government guarantees and subsidies to private entities without sufficient oversight and regulatory enforcement.

2.) If they say an institution is “too big to fail,” let’s see the proof. Show us the simulations, modeling what the consequences of their failures might be. Otherwise, there’s no way to distinguish real threats from scare tactics.

The only example of what a too-big-to-fail failure might look like is drawn from the Lehman Brothers’ collapse, which occurred at the beginning of the crisis and precipitated a drastic stock market decline and a retreat of credit from money markets and interbank lending. But we are not in the same world as we were when that collapse happened in September 2008. The kinds of assets that Lehman was holding have been significantly written down across the board and a lot of contraction has taken place throughout financial markets. Letting a bank fail now, with few other safe outlets for holdings, will result in market volatility and revulsion, to be sure, but the revulsion will be temporary as investment has few other places to go.

We are being threatened and these threats at least need to be substantiated by simulations that demonstrate the taxpayer will lose x amount if we do not bail out these entities versus amount y that we will pay over the long term for bailing them out. Needless to say, if x > y we bail out, keeping in mind the current outlays and government funds at risk for y is about $9.7 trillion. Economists like Stiglitz and Roubini and others should review the parameters used and be involved in evaluating the assumptions in the models. Once these simulations are run, we can decide which banks we must save.

3.) Taxpayers' costs need to be minimized in our overall strategy and at every juncture. To do that, the timing of the takeovers and the terms are imperative.

Former Federal Reserve Chairman Alan Greenspan pushed for his brand of "nationalization" paired in conjunction with the establishment of a “bad bank”, which Treasury Department officials are essentially pursuing with the Public-Private Investment Fund that would serve as a repository for assets of dubious value. His plan would entail cleaning the banks for complete private takeover and having the government assume responsibility for the assets of uncertain value.

But what price will be paid for these assets? What share of that price will be borne by the taxpayer and how much by the private sector? And would taxpayers share in the increased value of these assets over time, or would just private entities profit?

The same questions should be asked about the original TARP funds. How much will be lost in converting the preferred shares injected through TARP under the current adverse circumstances versus when the financial entity is becoming more healthy down the road?

These guidelines—1.) no money without strings, 2.) proof that bailout is in taxpayer’s interest and 3.) taxpayer cost minimization/benefit maximization demonstrated at every point going forward—must be the test of any Treasury/Fed/FDIC action from now on—whether the end result is called “nationalization” or bears some more politically acceptable label.