"Glossing over, with Paul Krugman
- Posted by:
- Economist.com | WASHINGTON
- Financial markets
PAUL KRUGMAN has linked to Free Exchange before, so I assume that he sometimes has occasion to read it. Let me try to goad him, then, into answering a question for me. Mr Krugman seems to be strongly in favour of nationalisation. In a post from yesterday, he cites a speech made by Barack Obama on some of the differences between the Swedish banking system and the American banking system, which might complicate nationalisation in America. Mr Obama said:
So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense.
Side note, I'm going to start dropping [LAUGHS] into my posts, just to cue you all as to when I'm trying to be funny. [LAUGHS]
To respond to this particular line of argument from the adminstration, such as it is, Mr Krugman cites Martin Wolf, who writes:
The four biggest US commercial banks – JPMorgan Chase, Citigroup, Bank of America and Wells Fargo – possess 64 per cent of the assets of US commercial banks (see chart) [chart not available online]. If creditors of these businesses cannot suffer significant losses, this is not much of a market economy.
See, America only has four big banks, so it's no big deal. Fine, I don't care about the numbers of banks at the moment. I care about this, which appears just a few paragraphs later in Mr Wolf's column:
If it is impossible to impose losses on creditors, the state could well own huge banks for a long time before it is able to return them to the market. The largest bank restructuring undertaken by the US, before last year, was that of Continental Illinois, seized in 1984. It was then the seventh largest bank and yet it took a decade. How long might the restructuring and sale of Citigroup take, with its huge global entanglements? What damage to its franchise and operations might be done in the process?
I therefore have two questions for Mr Krugman. First, do you agree with Mr Wolf in his assessment that if creditors are not made to face losses, nationalisation could be quite drawn out and expensive? And second, to what extent will the government be able to make creditors suffer, given the potential threat to the financial system this may entail?
This is the very heart of the nationalisation question, because if the government cannot risk foisting losses on to debtholders, then it's difficult to see how America benefits from nationalisation."Me: