A Protest I Would Like to Join

♠ Posted by Emmanuel in , at 2/20/2009 08:15:00 AM
If the turkeys are going under, then let them go under. The current strategy of partial nationalization does nothing to clean these banks up or prevent further beggary. I am surprised how the archetypal man on the street knows of the two contrasting options in handling America's financial woes. Either this drip-drip-drip process of creating zombie firms alike Japan's lost decade continues or the US bites the bullet and goes for the hard medicine of Swedish-style nationalization for a couple of years to (hopefully) clean up these banks before privatizing them again. While the latter option sounds more attractive to me, I've always thought it unlikely for quite a simple reason.

Unlike Sweden during that time, the United States has long been selling to the rest of the world this idea of buying stocks as a good long-term portfolio or direct investment. Say what you will about the idea, but I don't think equity investors worldwide would react very positively to Uncle Sam--the world's biggest stock peddler--knocking foreign investors' stakes to zero via nationalization. Isn't this the sort of thing you'd expect from some banana republic and not the Land of the Free, Home of the Brave? Wouldn't doing so be equivalent to the creeping expropriation Americans fear others would inflict on them? What's to stop the US from arbitrarily doing the same to any number of other industries in danger of imminent collapse? Most economists championing Sweden II simply ignore this: Full nationalization is (geo)politically unfeasible for a country as dependent on foreign capital flows as the US. Since this purports to be an IPE blog, I believe it's necessary to say it.

Richard Murphy has an interesting proposal for decoupling the system for exchanging money from the banks which are prone to engaging in moral hazard-tempting activities precisely because they know the government must bail them out since national money-handling systems cannot be allowed to disappear. Although Murphy's implementation requires tweaking (he is well the left of me), the basic idea is sound. Screw the banks by making the payment transfer network operate independently of the banks. That way, the need for "bailing out Wall Street" becomes redundant. Now hand me my placard reading "Wall Street's Disco Days are Over."