Self Righteous Indignation

The day after I wrote my post below on nationalizing the banks, I opened the Wall Street Journal to discover an op-ed piece by William M. Isaac, former chairman of the FDIC.  Isaac starts:

People who should know better have been speculating publicly that the government might need to nationalize our largest banks. This irresponsible chatter is causing tremendous turmoil in financial markets. The Obama administration needs to make clear immediately that nationalization — government seizing control of ownership and operations of a company — is not a viable option.

Unlike the talking heads, I have actually nationalized a large bank. When I headed the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, the FDIC recapitalized and took control of Continental Illinois Bank, which was then the country’s seventh largest bank.

Quite frankly, I’m not sure what to make of his piece.  For the former chairman of the FDIC, the agency that has so much experience in bank nationalization, to come out against this solution carries much weight.  In the very least, it shows that my self righteous final paragraph was a bit over the top.

When it comes to bank nationalization, though, Krugman and his friends on the left aren’t alone in calling for such a step.  The Wall Street Journal, in the process of thrashing the Obama administration, arrives at the same conclusion as Krugman:

Amid the continuing gloom, the message that investors hear when all five regulators line up as a phalanx is: Uh, oh, things must be worse than we thought. All the more so when those same regulators still aren’t offering any specific plans for moving ahead, much less any vision for where they want the financial system to end up.

One result of this uncertainty is that the Obama team has failed to stem a damaging public debate over “nationalization.” We think the debate is mostly beside the point, or should be. Some financial institutions — perhaps many — will have too little capital to absorb their current and future losses, and will end up being taken over by the Federal Deposit Insurance Corp. The FDIC has been doing this for decades, and in fact is now doing it nearly every week with smaller banks.

The agency protects insured depositors and then sells or otherwise disposes of the bank’s assets. This is precisely the kind of failing-bank resolution that we scored the Bush Treasury for not being prepared for, going back more than a year ago. We guess this is a form of “nationalization,” but it’s hardly new and it need not and should not require permanent government ownership.

The Economist has similarly lined up in favor of bank nationalization, not as the centerpiece of any policy, but as the natural outcome of a balanced approach to dealing with the banks.  The Economist is similarly hard on the Obama administration, and is especially critical of Geithner’s vague Feb 10 speech:

More worrying still is the chance that Mr Geithner’s vagueness comes from doubt about what to do, a reluctance to take tough decisions, and a timidity about asking Congress for enough cash. That is an alarming prospect. “Banksters” may be loathed everywhere, but more money will surely be needed to clean up America’s banks and administer the financial fix the economy needs. That, as this newspaper has argued before, means both some form of “bad bank” for toxic loans (with temporary nationalisation part of that cleansing process, if necessary) and guarantees to cover catastrophic losses in the “good” banks that remain. Mr Obama’s team must recognise this or they, like their predecessors, will come to be seen as part of the problem, not the solution.