Strawman Constructed; Point Missed
- Posted by ryan on May 7th, 2009 filed in Finance
Simon Johnson and James Kwak are smart guys, but this is just ridiculous:
Back in February, America was mired in a public debate over the word “nationalization” and what it meant for our banking system, with contributions by Nobel Laureates Paul Krugman and Joseph Stiglitz, former and current Fed officials Alan Greenspan, Alan Blinder, and Thomas Hoenig, and administration figures Timothy Geithner, Larry Summers, and even Barack (”Sweden had like five banks“) Obama, among others. On a substantive level, the debate was over whether large and arguably insolvent banks should be allowed to fail and go into government conservatorship, as happens routinely with small insolvent banks. Opponents of this view who wanted to keep the banks afloat in their current form, including the current administration, beat off this challenge by calling it nationalization (more precisely, by demonizing government control of banks). Perversely, however, what we got instead was increasing co-dependency between the government and the large banks, as well as increasing influence of the government over the banks, and vice-versa. And according to the market, the banks should be quite happy with this outcome.
Emphasis mine. Thomas Hoenig has been making a similar point, and it’s just absurd. For the most part, those arguing against nationalization weren’t doing so on the basis that it was nationalization, full stop. They were doing so because they felt, quite reasonably, that nationalization was likely to be extremely complicated, risky, costly, logistically or legally impossible, or some other collection of reasons. I don’t see what good it does these guys to fail to engage the legitimate arguments being made by those on the other side.
What’s also interesting is that in the piece excerpted above is a point they make that has also been argued by Thomas Hoenig and others (Steve Waldman, for instance) — that the big problem with not nationalizing is that it brings the banking sector through the crisis without any significant reforms taking place. Now, I understand this outlook. Our largest banks dominate the system, and breaking up Bank of America and Citigroup would strike a huge blow for the cause of too-big-to-fail is too-big-to-exist and against moral hazard. But that actually leaves most of the difficult work undone. Other, solvent banks would swoop in and take the exposed market share, and the fear of god would eventually be forgot.
What we actually want to see are some fundamental changes to the regulatory system that will constrain behavior and leverage at all firms, along with new oversight capabilities and responsibilities. Certainly, I think that explicit nationalization authority for large and complex institutions should be a part of such regulatory reform, but I think that that authority should, along with the rest of the changes, emerge from a sober and considered piece of legislation. I don’t want my reform to come in the heat of battle.
There is obviously a risk that when conditions improve the impetus for reform will be lost. But I think there’s a pretty substantial window in which reform can take place. It’s more important to do regulatory reform right than to do it quickly. I don’t see a vague concern that in the next year anger at and worries about the banking system will evaporate as a good reason to undertake a tricky and risky nationalization now.