Are We All Swedes Now?

Last week, Rep. Barney Frank (who helped get us into this financial mess by insisting that Freddie Mac and Fannie Mae were financially sound up until the day they failed) and his cronies on the House Banking Committee spent time beating up on the bank CEO’s and wondering what they are doing with the money given to them by Congress. Why aren’t they lending more of it? Is Barney Frank really that dumb? Wait, don’t answer that.

Why wouldn’t banks lend money? Let’s look at some possible reasons.

a) The banks are all run by greedy bastards who want to take taxpayer money and do whatever they want with it

b) The banks are discriminating against good people who qualify for loans

c) The banks are holding the money they received from Congress in reserve because they are actually broke and can’t make loans

Clearly, judging from the questions that Rep Frank and his colleagues asked the bank CEO’s, they’re operating from the viewpoints of choice “a” and “b.”

I think the answer is “c” and I don’t even think it’s close.

We’ll know for sure in April when they have to release first quarter earning statements. I’m betting that some of those banks are going to be worth less than what Congress loaned them.

At which point, you will have to seriously talk about nationalizing some of those banks or simply letting them fail. Matthew Richardson and Nouriel Roubini, professors at New York University's Stern School of Business, make a good case for Nationalization of the banks in a Washington Post article “Nationalize the Banks. We’re all Swedes Now.”

My biggest concern is how would you stop a bank run once you declare a big bank insolvent? You’ll have to guarantee deposits but shareholders will be all but wiped out. And if shareholders know that the bank is going to be declared insolvent, what’s to stop them from taking all of their money out before that happens? Even just the hint of insolvency could start a bank run. Citigroup and Bank of America are large institutions that would affect the whole system if they went down. Last year, Senator Chuck Schumer hinted that there might be a problem with Indy Mac and before you knew it, that bank was dead as customers rushed to take their money out. Washington Mutual suffered a bank run from May through July of last year and ended up being bought by Chase.

My other concern is that once government gets its hands on something, it doesn’t like to let it go. Bank nationalization, combined with a high corporate tax rate, and whatever other stringent regulations a Obama-Pelosi-Reid government is likely to push through, might also leave investors sitting on the sidelines or fleeing for other countries.

I’m not saying that bank nationalization couldn’t work if it’s done right. But given the administration’s behavior so far – the $787 billion stimulus bill, Secretary of the Treasury Geithner’s lack of a coherent plan to spend the rest of the TARP funds, the apologists in the foreign policy arena - I have very little faith in the current administration to pull it off.