Babel Tower...

It's amazing we manage to get anything done around here.  For example, there is bad bank and there is bad bank, and now that everyone is saying that we need a bad bank, and Geithner even thinks a bad bank is a good thing, why don't we try to understand if they mean bad bank, or bad bank?

For me there is:

The GOOD Bad Bank.  Gotta LET THE BANKS FAIL FIRST.  A few people have pointed to the bad bank that existed during the S&L crisis (the Resolution Trust Corporation), which managed to recover some value for the taxpayer.  Another favorite is the Swedish model, which is said to have recoved between 50% - 90% of government expenditure on the cleanup.  But it bears reminding that both these involved removing the bank from private hands: the first, through bankruptcy, and the second, through full nationalization.

The BAD Bad Bank.  IOW, keep the bastards in so they can continue the elaborate ruse of finding new ways of paying themselves multi-millions in bonuses.  But have them sell the rotten assets to the government for far too much money, to be held in the bad bank, on the theory that "recovery" is just around the corner.  Um... no thanks?

Finally, today  yesterday Marginal Revolution points out how there is similar confusion of just what Nationalization entails.  For example, the idea of doing things the way they've always been done (letting insolvent companies go bankrupt) has somehow become taboo out of some fear of nationalization (emphasis mine, and with some editorializing):

I believe that bank nationalization is now very likely. It may even be desirable. The term nationalization, however, clouds judgment on both sides of the debate. It's better to think of what we want to do as bankruptcy. Many of the major banks are insolvent. When the liabilities of an ordinary firm exceed its assets the firm enters one of a variety of types of bankruptcy procedure during which management is often removed, the firm is sold or reorganized and liability holders take ownership or are paid off at a discount. Notice that we do not call a bankruptcy procedure, nationalization, even though it typically occurs under the auspices of a government employed judge.

When it comes to the banks the issue is more complicated than with an ordinary firm because the major liability holders are depositors whom the government has guaranteed. As a result, the ultimate liability holder is the government. [G]iven deposit insurance, the procedure most consistent with free market principles is bankruptcy (nb: actually, I believe it is technically conservatorship -ed.), preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field. (NB: of course, the FDIC being a government entity, and therefore, the taint of there being some sort of nationalization -ed.)

A speed bankruptcy; 1) punishes current management reducing moral hazard, 2) will be less politicized if done under the auspices of the FDIC than if done piecemeal with congressional involvement and 3) will get the banks working again as soon as possible. (NB: And I believe the problem being that these actions, done by the FDIC, are for some reason being perceived as Nationalization -ed.)

Notice how the term nationalization confuses the issue. First, it suggests government ownership of the banks which would indeed be a disaster. People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership. Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside. That idea is a joke - there is no upside. Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.

Bankruptcy... is a normal free market procedure, it emphasizes that the firm has failed and current management should be removed. Framing the issue in this way makes it clear that only the depositors should be protected and under reorganization there should be no control over wages on future management (wages are going to have to be high to get anyone to take on the task). Finally the idea of bankruptcy makes it clear that the goal is to get banks solvent, under new management, and back under private control as quickly as possible.

And today, Naked Capitalism remarks on this nomenclature problem as well.  I guess pre-privatization it is!

(On a more personal note, work has been really steady, even busy, for the last few days.  I guess this means that my job won't be "right-sized" tomorrow?  *fingers crossed*  We're still waiting to hear about J's job.  February's almost over and they said by April at the latest.  My on-line class is kicking my ass, it's hard and it's not fun.  I am seriously dreading the final.  Pbbbt...  All this is a roundabout way of apologizing for the state of my posts.  They sucketh badly.  But y'know, I'm kinda swamped.)

Comments

[M.G. in Progress]

The case for not nationalizing the LEMON BROTHERS, since there are alternatives.

[JimsOpinion]

What a fun read! Like your whimsical & cynical views. And bully for having the chutzpah to shout only what the market prices are whispering.

I agree with your bankruptcy plan, but with a little twist...we need to solve the root issue of banks creating illegal instruments like credit swaps and derivatives that effectively guarantee the buyer (mortgage holder) against loss...while Congress has been quick to throw money at the industry, they haven't solved the problem or eliminated the risk buried in the existing contracts, which is in the trillions (10-50)...if we don't outlaw the "complex instruments" that only Wall Street understands, the bailout will never end...banks were never allowed to be in the insurance business and we need to return to that standard of law...IF Congress outlawed the derivatives for regulated entities (and banished them to hedge funds where investors are on their own) and gave banks 1 year to get out (ie: repay the risk premium they received on the sale), then we have an opportunity to move forward...If the bank isn't able to get out of the contracts, they would face a bankruptcy proceeding that would wipe out the illegal contracts with unsecured creditors and stockholders (who profited by engaging in crappy deals for a quick buck)...the deposits and loans of most of the big banks, less the toxic contracts (not debt) would probably constitute a decently capitalized bank after bankruptcy, and certainly able to raise private capital in a healthier market that now trusts the balance sheet....just my opinion.