"Paul Krugman responds
- Posted by:
- Economist.com | WASHINGTON
- Financial markets
PAUL KRUGMAN has been a strong advocate of nationalisation, but he hasn't, in my view, been particularly clear about what he thinks that should entail and why it's so crucial. I've been pressing him on these points, and today he offers a response.
The benefits from nationalization come from (a) giving taxpayers a share of the upside rather than just a share of the downside, which is where we are now (b) ending the gaming of the system, even looting, that is encouraged by the current system of implicit guarantees (Simon Johnson has been very good on that) (c) making it politically and fiscally feasible to put in enough capital to revitalize the system. These advantages are there whatever you decide to do with junior bank debt.
That said, some decision must be reached on bank liabilities. Sweden guaranteed all of them. If forced to say, I would go the Swedish route; but of course we can’t do that unless we’re prepared to put all troubled banks in receivership. And I’m ready to be persuaded that some debts should not be honored — this is a deeply technical question.
This clarifies quite a bit. It offers a rationale for nationalisation that doesn't centre on the questionable priority of increasing bank lending, and it deals seriously with the question of bank liabilities, rather than postulating a fantasy scenario of nationalisation on the cheap that involves punishing bank debtholders. It is a pretty sound argument.
A few questions remain, however. One concerns the government's ability to limit the number of banks in receivership. Since we may be talking trillions of dollars in liabilities, it would be nice to leave standing as many banks as possible. Can the government take control over Citigroup, and possibly Bank of America, without putting itself in a position where nationalisation of JPMorgan Chase and Wells Fargo is also necessary? Is the government going to guarantee all bank liabilities? As Mr Krugman acknowledges, this is not an easy question.
The other point touches on Mr Krugman's third point in favour of nationalisation, that it makes it, "politically and fiscally feasible to put in enough capital to revitalize the system". That, I think, is an interesting question. If one accepts that banks must be helped and cannot simply be allowed to earn their way out of insolvency, then is the government more likely to achieve the necessary recapitalisation via the current, creeping bail-out or through nationalisation? It's hard to say, but the latter option does have the benefit of putting the government on the hook once and for all. That is, so long as the plan is a slow motion injection of funds, Congress can get fed up and turn off the spigot. But when the banks are officially the taxpayers' banks, well, Treasury has to do what it has to do to keep the financial system functioning, and to get the banks into shape to be privatised.
This remains a very difficult situation, and it's nice to see Mr Krugman recognising the challenges posed by nationalisation."Me:
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