The banking crisis: Is nationalization the only way out?

Secretary Timothy Geithner plans to pump $1.5 trillion into failing banks, yet experts say that major U.S. banks already have $2 trillion in bad debt, and future losses in the financial system might raise the amount to as much as $7 trillion.

The U.S. banking system is in “a death spiral,” said Matthew Richardson and Nouriel Roubini in The Washington Post, and only an “all-out government takeover” can prevent a complete collapse. Economists and banking experts are starting to whisper that Treasury Secretary Timothy Geithner’s latest bailout plan, to pump $1.5 trillion into failing banks, is too little, too late. The International Money Fund, Goldman Sachs, and other financial experts estimate that leading U.S. banks already have $2 trillion in bad debt from the subprime mortgage collapse. As the recession spreads through the economy like a malignancy, bank assets are losing value, and other loans are going sour, including commercial real estate loans, credit card debt, and millions of additional mortgages. All told, the financial system is facing possible total losses of $7 trillion. As free-market economists, we normally take a dim view of government intervention. But with the banks “effectively insolvent,” we’ve concluded that the only viable solution is nationalization.

Many banking experts are coming to the same conclusion, said Steve Lohr in The New York Times. The nation’s 50 largest banks “are dead men walking,” with potential losses far larger than their assets. “When I talk to experts,” said Simon Johnson, a banking analyst at the Sloan School of Business at M.I.T., “after about two minutes they say, ‘We should just nationalize.’ That tells me that the consensus is moving in that direction, and we are all afraid to say it.” Nationalization may be a drastic step, said Martin Wolf in the Financial Times, but Geithner and President Obama are making a terrible mistake in throwing more money at the crisis and “hoping for the best.” It’s far more sensible for the government to take a majority stake in the banks worth saving. It could then sell off the bad debt and restructure the banks to the point at which private investors would feel confident enough to start putting capital back in. As the banks regained healthy balance sheets, Washington would sell down its stake. Some critics, including Geithner, insist that the government can’t manage assets well. But Sweden used nationalization to save its banking system in 1992.

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