"Dissembling, I have concluded, is hard-wired into the banks’ DNA."

From Alphaville:

"Nationalisation linkfest Posted by Sam Jones on Jan 20 11:48. 6 comments.

To nationalise or not to nationalise?

The UK government has shown its hand. TARP II is underway in the US.

If the latest gamut of policy responses don’t work - and there’s plenty who say they won’t - then nationalisation of banks is very much the only option left. More…

To nationalise or not to nationalise?

The UK government has shown its hand. TARP II is underway in the US.

If the latest gamut of policy responses don’t work - and there’s plenty who say they won’t - then nationalisation of banks is very much the only option left.

With that in mind, FT Alphaville has rounded up a selection of the pro-nationalisation views currently on offer . ( AM I LISTED? )

Kicking things off is Paul Krugman, who says nationalisation is preferable to a zombie banking collapse:
…many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking… Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal - and that we’re about to get another financial rescue plan that fails to do the job.

Exactly what Krugman means when he refers to voodoo accounting at the banks is fleshed out by analysts at RBS - according to whom, the UK’s banks are “technically insolvent”. (via The Independent, via Naked Capitalism):

Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that “the domestic UK banks are technically insolvent on a fully marked-to-market basis”.

The warning does not mean British banks are about to go bust, because the assessment is purely theoretical, and RBS said the position was “not unusual at this stage in the economic cycle”.

Technical insolvency is not necessarily grounds for nationalisation and as the analysts note, is not wholly unusual in a downturn. Then again, we nationalised Northern Rock. Edmund Conway, the Telegraph’s economics editor says there’s little difference in some sense between the Rock and RBS:
Pragmatically speaking, there is little to separate RBS and Northern Rock in terms of their asset books or control structures, nor indeed their absolute reliance on the Government for support. Should the stream of losses continue at even a fraction of this rate, the company looks a banker to return to the Government for further capital injections and, ultimately, nationalisation.

Looking at the picture more broadly, the LSE’s Willem Buiter argues that bailouts simply don’t work : in fact, they actually incentivise banks to stop lending:
But I believe that costly partial state ownership and the fear of future state ownership (partial or complete) are themselves discouraging banks from lending… If a bank has no option but to take the government’s money, it will try to repay it as soon as possible - to get the government out of its hair. Such a bank will therefore be reluctant to take any risk, including the risk of lending to the non-financial private sector. Such a bank will hoard liquidity (sometimes in the form of deposits/reserves with the central bank) to regain its independence from the government. Still independent banks will hoard liquidity to stay out of the clutches of the government.

And Hans-Werner Sinn, Ifo president provides some concrete German examples to back-up Buiter’s points:

Faced with the choice of reducing business or seeking to return to previous volumes by accepting government equity, bank executives will opt for the first alternative in order to avoid cutting their own salaries.

With such arguments against bailouts in mind, nationalisation is probably, then, the lesser of two evils, Felix Salmon suggests over at Portfolio.com:

Given how messy all of these alternatives are, why not simply go down the nationalization route? It’s transparent and easy to understand: if a bank is insolvent (and the FDIC is good at making those determinations), then simply nationalize it. That’s what the Swedes did, and that’s what we should do too.

Steve Waldman at interfluidity fleshes out the Swedish model: which involved nationalising the two nations largest troubled banks and then, reprivatising them later:

The state took full ownership and control over Nordbanken in 1992, actively cleaned it up, and eventually reprivatized it. During the crisis, Nordbanken purchased Gota, effectively nationalizing the smaller bank. It is true that only these two banks were nationalized, and a Swedish government description of the crisis is careful to note that, as a matter of policy “the state would not endeavour to become an owner of banks or other institutions.” But Nordbanken alone had an asset base of 23% of GDP. To put that in perspective, in US terms that’s almost as large as Citi and Bank of America.

And for a more first-hand exposition of the Swedish experience of bank nationalisation, it’s worth consulting this 1997 Jackson Hole speech by Urban Bäckström, former governor of the Swedish central banks. The crucial thing seems to be that banks were forced to present a full account of expected losses and writedowns:

This clarifies the extent of the problems and the support that is required. Provided the authorities and the banks make it credible that no additional problems have been concealed, this procedure also promotes confidence.

Joshua Rosner of Graham Fischer says that like Sweden, the best bet for the US (and the UK) would then too be for banks to be forced to writedown all their suspect assets and then have equity bought by the government. Writedowns and then nationalisation.
Faced with a similar crisis in the 1990s, Sweden forced banks to write down bad loans, then the government injected liquidity into the system and profited from the upside after taking equity stakes in the banks.

Interesting that Brown is calling for banks to “come clean” then.

Which brings us perhaps to the current UK situation. And whether, as says the Economist we’re on a course of “creeping nationalisation” anyway :

Despite repeated government claims it is not interested in running banks, creeping nationalisation may be on the way:

There is little in the new package to give banks the incentive to put their profit motive aside and help to reflate the economy. RBS and Lloyds have some private shareholders who could sue if they suspected their interests were being abused… Unhappily, the government’s new measures do not dispel the uncertainty that continues to weigh on banks’ balance sheets.

The government … has chosen a slow and complex route.

A “slow and complex route” that the Economist’s Free Exchange blog is meanwhile, quite explictly no fan of:

Time to quit mucking around and make with the nationalisations.

Finally, if it’s coming, then make sure it’s done properly says John Hempton at Bronte Capital in his blog post Nationalisation after due process:
What I want is extreme government action (nationalisation) but with a process to ensure that existing property rights are honoured. I want the benefits of nationalisation (that it works) without the costs (that it is seen to be arbitrary to capital providers).

Update: For further reference, FT.com now has a very interesting video of PE chief Guy Hands’ thoughts on nationalisation and Phillip Stephens’ op-ed (”Shoot the bankers, nationalise the banks”) is an excellent read:

Dissembling, I have concluded, is hard-wired into the banks’ DNA."

A very useful brief.

"We talk about it, but have not properly understood it"

Philips Stephens in the FT about Prediction:

"The season of seers is upon us: the time for commentators to reinvent themselves as clairvoyants. Confounded by the present, they (or do I mean “we”?) seek solace in the certainties of the future. The imminence of Barack Obama’s presidency makes the temptation this year doubly irresistible.

True, anyone who takes the trouble to look back at some of the punditry of December 2007 could be forgiven for treating all this with a certain scepticism. One of the things we might have learned from the tumult of 2008 is just how quickly the unthinkable can become the unremarkable.

Never mind. Perhaps there is indeed a sage somewhere out there who foresaw that during 2008 the oil price would first soar to $150 a barrel and then crash just as quickly towards $40. The same prophet no doubt predicted the demise of the global investment banks – the collapse of Bear Stearns and Lehman and the flight of those masters of the universe at Goldman Sachs into the humbling embrace of the US Federal Reserve.

From there, it was but a small step to predict that plucky little Iceland would go bust and that governments everywhere would return front and centre stage to nationalise the global financial system. Interest rates at close to zero, banks taken under state control, hedge funds vilified? It was all there in the tea leaves.

Surely the commentariat anticipated the death of the do-as-you-please liberal capitalism that had reigned supreme for more than a decade? Didn’t we? As for Bernard Madoff’s alleged £50bn fraud, it was obvious all along that his investment fund was a vast Ponzi scheme? Wasn’t it?

The same perspicacity led the pundits to predict that Mr Obama would emerge the winner from a contest with John McCain. You know, I was sure that Hillary Clinton and Mitt Romney were tipped as racing certainties for the Democratic and Republican nominations. I must have missed something.

Anyone with the slightest feel for British politics would have known too that Gordon Brown’s stock as prime minister would soar even as the economy slid into an economic bust he had promised could never happen. And just about everyone knew that the determinedly dour Mr Brown and France’s well, rather more gregarious, Nicolas Sarkozy would end the year the very best of chums.

To be fair, the soothsayers got some things right. George W. Bush has not disappointed the prevailing view that his presidency would come to a wretched end – even if this week’s shoe-throwing incident in Baghdad elicited a sympathetic wince even from some of his harshest critics.

To borrow a sporting cliché, 2008 has been a year played in two halves. The first saw the rehabilitation of Thomas Malthus as governments joined a desperate contest for dwindling global resources.

Commodity prices headed for the stratosphere; central banks saw the spectre of inflation. As for the economic slowdown in the world’s most advanced economies, this was no more than a necessary adjustment. The rising powers of Asia would pick up the slack. Remember all those confident theories about “decoupling”?

In the geopolitical sphere, the narrative was about energy riches fuelling the rise of authoritarianism: the world would belong to Vladimir Putin’s Russia, Hugo Chavez’s Venezuela and to the sovereign wealth funds of the Gulf. Democracy would retreat before an authoritarian axis running from Moscow to Beijing.

The second half 2008 has turned the first on its head. Malthus has been returned to the history books and John Maynard Keynes has been disinterred in his place. The state, politicians have decided, has a role beyond standing back to let the market weave its magic.

Mr Putin has been humbled by a collapsing stock market; China has not escaped the economic misery of the west; Dubai no longer seems quite the Eldorado of earlier imagination.

Investment bankers have fallen lower even than journalists in rankings of public esteem. Central banks have discovered that the problem is not inflation, but deflation. Just as we thought that $150 oil would be with us forever, so now the economic slump seems to stretch into an indefinite future.

If there is anything that has united the two halves of the year, it has been the extent to which conventional wisdom has provided a wholly inadequate explanation of events ( HOW TRUE ). Official responses to the successive crises that would once have seemed eccentric are now mainstream ( MAYBE THERE'S HOPE FOR ME ).

The bigger lesson has been about how hard we find it to peer into the present. Economic interdependence and the shift in relative power to the rising nations of the east have been a commonplace in our discourse for some time. It is only this year that we have begun to see what the changes mean ( YIKES ).

On the financial front, the message has been about the failure of political governance to keep pace with the integration of global markets; governments, central banks and regulators have simply failed to keep up with the ever-tighter interconnections between markets.

The result? A contagion whose virulence has surprised even those who had the prescience to foresee the threats inherent in the financial alchemy that turned subprime mortgages into seemingly triple-A-rated financial instruments ( THAT'S TRUE. THE MARKETS AND INVESTORS BELIEVED THAT GOVERNMENT COULD CONTAIN AND DEAL WITH A FINANCIAL CRISIS PRETTY QUICKLY AND EFFECTIVELY ) .

The geopolitical story has been one of more tables turned. Until this year financial crises were things that happened to “them” – to Latin America, Asia, Russia and Africa. The credit crunch was made in the west – a story not of the irresponsibility of the emerging world but of the profligacy and regulatory failures of the most advanced nations. This time the rising states were the creditors, the west the debtors.

There lies the wider context for the truly extraordinary events of 2008 – a world in which the established order has cracked in response to the changing pattern of power. Everyone sees the rise of China and India, America’s relative decline and the inadequacies of the international system. Now we know something of what this passing of the post-cold war world means in practice.

The chaos speaks to a world in which the west is surrendering centuries of economic and political hegemony; to a globalisation that has at once weakened nation states and demanded more of them; and to an emerging multipolar system that has broken the multilateral boundaries of the old order. We talk about it, but have not properly understood it. There is no harm in looking for the future in the stars – but we are more likely to find it in the present."

IT WILL MORE THAN LIKELY FIND US.

"We are watching a bonfire of the old orthodoxies as well as of the vanities."

Here's another "Government grows in a crisis" column by Philip Stephens in the FT:

"We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers’ dollars to prop up the sinking US economy. Gordon Brown’s British government announced it would soak the rich to pay for an economic rescue package.

In between times, the Bush administration all but nationalised Citigroup, the world’s largest bank. For good measure it threw another, yes another, $800bn into the effort to thaw US credit markets. Everywhere you look, Keynes’s demand management is replacing Adam Smith’s invisible hand; printing money, a mortal sin under the fracturing Washington consensus, is the new prudence.

Something big is happening. What started out as a series of pragmatic ad hoc responses by governments and central banks is moving the boundary between state and market. Politicians are now overlaying expediency with ideology. Government is no longer a term of abuse.

Things could move still faster in the months ahead. With their myriad rescue schemes and loan guarantees, the US and British governments have nationalised their respective banking systems in all but name. The banks pretend they are still answerable to their shareholders, but it is a charade. They survive only with the explicit financial guarantee of the state."

Truly speaking, this system of explicit guarantees of government intervention in the case of a financial crisis WAS OUR SYSTEM, and IS OUR SYSTEM. How can it possibly come as a shock to anyone any more? And enough about the ideological pieties, which get chucked out at the first supplication for government largess. Who believed them? Not me.

"Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks. Nationalisation could be the first act of an Obama presidency. That at least would put some substance into all those loose analogies with FDR.

Either way, the simple fact that public ownership is viewed as a serious option – and Mervyn King, the governor of the Bank of England, said as much this week – tells you how far we have travelled from the liberal orthodoxies of recent decades. What was hailed as the new financial capitalism is making way for old-fashioned state direction. The politicians, meanwhile, are reclaiming some of the language of that earlier age. Higher taxes on the wealthy are no longer taboo; regulation has been rehabilitated; markets can fail.

It seems only yesterday that the onward march of the Anglo-American model of liberal capitalism – small government, fiscal prudence, deregulation, flexible and open markets – set the shape and tempo of the global economy. Some European governments fought a long rearguard action against what one of my French friends calls the hyper-capitalism of the “Anglo-Saxons”. But to a greater or lesser degree all made their accommodations."

Hold on. FDR wasn't a Marxist or Socialist. Let's not get carried away.

"In the US and Britain, the centre-left learned it could win elections only by accepting the Reagan-Thatcher settlement. Bill Clinton, a Democrat, wrote the requiem for big government.

In Britain, Tony Blair, aided and abetted by Mr Brown, built New Labour’s electoral success on the promise that it was as much a friend of individual aspiration as of social justice. As proof, it promised never to raise the top rate of income tax from the 40 per cent set by the Thatcher government in the 1980s. As for markets, there was no one more scornful than Mr Brown of the continental European model of a more regulated social market capitalism.

That was then. This week Mr Brown said he intended to raise the top tax rate to 45 per cent. This would be the new dividing line with David Cameron’s opposition Conservatives. The measure will raise only a fraction of the revenues needed to staunch the haemorrhaging of the nation’s public finances. What matters is the political symbolism: for Mr Brown, fairness now trumps aspiration."

Do you remember the S & L Crisis? Who took care of that? Earl Browder and Norman Thomas?

"Until quite recently, it was possible to say that rescuing the financial system was calculated to save rather than sink liberal capitalism. As after past recessions, the system would survive the shock more or less intact.

To a degree the assumption still holds true. I have yet to see a politician climbing on to a soapbox to proclaim the ideological case for nationalising the banks. Mr Obama has promised a Rooseveltian strategy to rebuild America’s infrastructure, but he is careful to talk about active as opposed to big government.

The leading members of Mr Obama’s economic team were among the most enthusiastic apostles of liberal markets during the Clinton presidency. Main street America did not vote to throw out the capitalist baby with the bankers’ bathwater.

Even as he tosses overboard the emblems of New Labour, Mr Brown, too, is wary of suggesting that government should take more control over the lives of ordinary voters. After a spate of bad headlines, Downing Street now insists that higher taxes for the wealthy are an “extraordinary measure for extraordinary times”.

The caution is understandable. Voters want security against wild-west capitalism. They do not want to be smothered by the state."

He's losing me.

"For all that, the boundaries have moved. Busts always provoke a backlash. More often than not, all is forgotten in the subsequent upswing. But this time it is more than a bad hangover. The consequences of the crash of 2008 will be felt well beyond the eventual recovery."

He's found me again. That's basically my position as well.

"For one thing, the banks are going to be under state administration, if not ownership, for a very long time. The old capitalism (and by that I mean the variety that until this year we called the “new” capitalism) was predicated on a financial system that created an endless supply of cheap credit. It will take more than a cyclical upturn before politicians again allow banks to manufacture money on such an epic scale.

That will demand deep structural adjustments in economies kept afloat on the sea of credit. The US, Britain and the other boom-to-bust economies will find the world no longer willing to finance their domestic housing and borrowing booms. Voters, meanwhile, will absorb the message that it is no longer a self-evident truth that ever more liberal markets deliver painless prosperity.

The risk is that the recalibration will go too far: that innovators and entrepreneurs will be put in the stocks with investment bankers; and that fettered markers at home will be accompanied by protectionism abroad. Lest we forget, for all its manifest flaws, a liberal trading system has delivered hundreds of millions of people from abject poverty."

Basic agreement again.

"The market has lost its magic, but we do not know whether Mr Obama can properly rehabilitate government. So the shape of a new settlement is far from clear. What is certain is that things cannot be as they were."

I'm not so sure about that. As Karr said, "plus ça change, plus c'est la même chose".