National Banks of America?

The concept of nationalizing any major industry, especially banks and energy companies, has always had a strong negative connotation in America. The political culture has always associated “nationalization” with “socialism,” and socialism, like “communism,” is an economic concept that terrifies those who worship at the altar of “free market” capitalism.

The fears of nationalization are based on the premise that most Americans don’t want Washington bureaucrats running our major corporations, especially banks and energy companies. The general consensus is that having banks like Bank of America and oil companies like Exxon managed by the government will remove any incentive for both industries to invest their own money toward innovation and modernization. Private industry (translation=”big corporations”) is always viewed as being far more efficient and more friendly to its clients (translation=”we the people”) – and therefore can do a better job than government.

(Friday, Feb. 20, 2009) It has been reported that Senator Christopher Dodd, chairman of the Senate Banking Committee, suggested that the Obama administration wants to avoid nationalizing U.S. banks, but that certain banks might have to be nationalized for a short time. According to Bloomberg and other sources, Dodd stated that he didn’t welcome that possibility, but could see that it was possible and might actually happen.

In reality, many banks and major corporations have been nationalized to some degree in the past, albeit with mixed results.

President Franklin Delano Roosevelt took over the banks and declared a “bank holiday” in 1933 to stop the disastrous mass withdrawal of funds due to public panic. The banks were released back into the private sector in a short time, but were forced to carry and pay for government insurance for all accounts under $100,000 (now $250,000) to the FDIC to protect their depositors. Roosevelt’s action is credited as being the first step toward ending the “Great Depression.”

During World War 2, 90% of major industry in the United States was effectively “nationalized.” Giant corporations that included the automobile, steel, and petroleum industries were still run by their civilian managers, but the federal government told them exactly what they would manufacture, how much and how often they would produce, and told them exactly what they would be paid. Thanks to this approach, America was in and out of the worst war in human history, one we fought on two major fronts on a world wide basis, in less than four years.

So it is with our current banking crisis. Wouldn’t it be better to have competent banking executives, those with reputations untarnished by recent scandals, volunteering to work to achieve an industry turnaround situation for reasonable compensation packages? Instead of forcing them to work under the very CEOs and directors that managed these big banks into bankruptcy, let them work under the guidance of government officials like Federal Reserve Chief Ben Bernanke and Secretary Tim Geithner and be directly responsible to the President. Above all, let there be transparency to what they are doing, so that the American public can be reassured that progress is being made toward an ultimate solution instead of a bunch of already wealthy fat cats making themselves richer using taxpayer money.

Nationalization would absolutely require tighter regulations from Congress, closing some banks and having them operate under the supervision of the FDIC, and having the entire industry under the direct supervision of the Federal Reserve, Treasury and General Accounting Office. Above all, the American public and members of Congress should be informed at specified intervals as to how taxpayer money is being used and what results are being achieved.

Nationalization may not be the right solution for the entire banking system, and in many cases it simply would not be needed. Small locally run banks and most credit unions seem to have weathered the crisis well because they have maintained conservative lending and investment approaches in their daily operations. Whether any of these financial entities should be included in a government takeover would need to be made on an individual basis, based on their demonstrated performance.

Any government bank takeover plan should be viewed as temporary. If and when the banking system stabilizes, then a carefully programmed return of these institutions to tightly regulated private ownership should occur, similar to what happened to the country’s major manufacturing industries after the World War.

For now, however, the viability of most of the major banking institutions in this country is doubtful. When you have banks like Washington Mutual and Wachovia disappearing almost overnight, and Bank of America and Citigroup trading on the stock exchange for just pennies, you have to acknowledge that the government must step in and take decisive action.

Should big banks be nationalized? Lindsey Graham says we might…

We also have to realize that it is inevitable that some major banks will not survive in spite of the government’s endless stream of band aid measures. As the process progresses, some will need to be taken over, some declared bankrupt and closed, and others forced to merge.

The real question is how much time, effort, and taxpayer money will have been wasted before someone with the power (read the Federal Reserve, the Treasury, or the President), uses that power effectively to stop the destruction of our nation’s financial system. It has been admitted that the possibility that the Obama Administration may need to nationalize some financial institutions and the issues have been discussed at some length in and out of the White House.

The fear is that the highly charged political nature of just the mention of the word “nationalization” will create an initial policy by the Obama Administration of almost any action except nationalization. Politics aside, the urgent nature of this problem requires immediate action and any delay in stabilizing the banking system could set the stage for a complete and irreversible meltdown of our economy.

The current Treasury plan tries to tackle the banking industry problem using several different approaches: buying up or insuring toxic loans, injecting more capital into the system, and promoting more lending to consumers.

At this stage, the injection of more capital using taxpayer funds appears to be the administration’s choice for the near future. The trouble with capital injection is that funds are being given to banks with no control over their use to the same managers who drove those banks into near bankruptcy.

The process up to this point hasn’t been in any way transparent as promised by the Bush Administration. The public is beginning to feel that the Treasury is being looted by the same shameless financial opportunists that created the very situations and management decisions that created the current banking crisis. There aren’t any positive signs of stabilization to date, but rather an apparent deeper slide into financial hell and the rest of us are forced to follow behind.

Bank of America and Citigroup have received nearly $100 billion of the TARP funds, and yet they are both closer to the brink of complete collapse than when the TARP bill was passed. They have become the most likely candidates for immediate nationalization or FDIC takeover – or both.

So now what do we do? If we need to, do we use the bitter pill of nationalization to stop the disease before it spreads any further? Or do we just let these big financial institutions die and let their rotting corpses infect other healthy companies and corporations, pulling the entire system down into the depths of hell with them?

The current situation reminds me of an old childhood game that forced a choice between two unimaginable but equally horrific options. “Would you rather (a) slide down a mile long razor blade, or (b) swim in a river of burning gasoline?”

At the moment it feels like our government is faced with similarly distasteful options in dealing with the banking crisis.