It’s an argument for nationalizing the entire American banking system, or at least the biggest parts of it

After getting so much right lately, James Surowiecki goes off the rails here:

"Where Would Bank Nationalization Stop?

Felix Salmon, who has been banging the drums for the U.S. government to start nationalizing banks, cites a piece by the economist William Buiter as supporting the argument that the U.S. should nationalize Citigroup and Bank of America. But it’s a bit more complicated than that.

Buiter’s argument is that the British government, having already partially taken over some of the biggest British banks, needs to go ahead and fully take over all of them if it wants credit to start flowing again. The reason, he argues, is that when the threat of nationalization exists, those banks that haven’t been taken over will do everything they can to avoid it, which in practice means that they hoard capital (by not lending) in order to keep their balance sheets intact. If you take over the banks, you solve this problem, because the government can then go ahead and lend as much as it wants. In any case, the key idea behind Buiter’s piece is that partial nationalization (when some banks are nationalized and others aren’t) doesn’t work, and in fact makes things worse. If you’re going to do it, you have to do it whole hog.( NO YOU DON'T. ONCE THEY SEE THE DIMINUTION OF THE FEAR AND AVERSION TO RISK, THE BANKS WILL START LENDING AGAIN. ALL THAT WE NEED TO DO IS STOP THE CALLING RUN. )

What this means is that Buiter’s piece is not, as Felix suggests, an argument for nationalizing Citigroup. It’s an argument for nationalizing the entire American banking system, or at least the biggest parts of it—including banks that are at the moment relatively healthy( WRONG. WE'RE NOT BRITAIN. ). Now, it sounds increasingly like that’s what Felix and others are in favor of, but if so, we need a much better picture of what that process would look like. The U.S. has many, many more banks than Great Britain does, and even the biggest banks have only a small fraction of total U.S. deposits and loans. So nationalization in the U.S. would not be a matter of what Buiter recommends for the U.K., namely taking over a few High Street banks. (This is also why analogies to Sweden, which successfully dealt with a banking crisis by nationalizing its two biggest banks, in the early nineteen-nineties, are of limited use( I AGREE. GOOD POINT. ) in understanding if, and how, nationalization would work in the U.S.)

So far, according to ProPublica, 315 financial institutions have received TARP money, and more are likely to come. Do we want to nationalize all of them? Most of these institutions are not, at least legally, insolvent. Should the government just declare them to be insolvent and seize their assets, or should it pay market prices for the banks (which even at current deflated prices, would require an outlay of hundreds of billions of dollars)? And is the goal to restructure these hundreds of institutions while running them as banks, or simply to facilitate their orderly liquidation (in which case, do we essentially have a government-run banking system for the foreseeable future)?( WE'LL HAVE TO DO THAT WITH THE FDIC IF THEY FAIL )

At one point, Felix describes nationalization as “elegantly” putting an end to the current morass, while at another he describes it as “messy.” I think( GOOD FOR YOU ) the second description is far more accurate. This would be an incredibly complicated process, with massive ripple effects (psychological as well as practical) throughout the entire economy( DAMNED GOOD ONES I'D SAY ), and this is one time when simply saying “we’ll figure out the details later” doesn’t suffice."

I obviously don't agree. Letting the banks continue to pull our chain is the worst idea.