I like this Paul Krugman take on fears of a nationalized banking system. I heard some of that again today from U.S. Rep. Leonard Lance, who was in to speak with our editorial board (look for audio clips from the discussion next week). Lance said he didn’t believe in nationalization and that that business decisions should be left to private enterprise. To his credit, he is skeptical of the bank bailout — what he called TARP I and TARP II (and Tim Geithner’s Son of TARP, as he called it).
But his attitude misses the point. Here is what Krugman had to say:
We are not talking about fears that leftist radicals will expropriate perfectly good private companies. At least since last fall the major banks — certainly Citi and B of A — have only been able to stay in business because their counterparties believe that there’s an implicit federal guarantee on their obligations. The banks are already, in a fundamental sense, wards of the state.
And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders.
What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.
Basically, the market is afraid that we — the taxpayers — might want something for all the cash we’ve thrown at the system.
Hank Kalet 