Nationalize Banks?

In Turku Varadarajan’s Weekend Interview in WSJ 2/21/09 with the economist nicknamed “Dr. Doom”, Nouriel Roubini: Roubini makes a case for temporary and quick nationalization of some of the largest U.S. banks in order to “clean them up, and you sell them in rapid order to the private sector”.

Roubini is a believer in market economies as being the best of a lot of bad alternatives. He notes that “paradoxically, the proposal [of nationalization] is more market-friendly than the alternative of zombie banks.” Lindsey Graham, the conversative Republican senator, said he wouldn’t take the idea off the table. Alan Greenspan concurred that it might be necessary to “facilitate a swift and orderly restructuring.”

Banks that were too big to fail have become “even-bigger-to-fail” as one bank giant swallows up another bank on the verge of collapse. Roubini proposes a hypothetical takeover of one of the giant banks, splitting it into 3 or 4 pieces, making each piece a regional or national bank and selling them.

The more troubling question to Roubini is that we repeatedly get into periods of asset and credit bubbles, bubbles that a lot of people believe are sustainable until they implode. He criticizes Greenspan for losing sight of his central mission: as head of the central bank in the U.S., his job was to provide financial stability. Roubini believes that Greenspan kept a rigid ideological adherence to Ayn Rand’s philosophy, a belief that “there are no market failures, and no issues of distortions on incentives.”

Roubini characterizes the last decade as one of self-regulation which created a “law of the jungle”, where greed is untempered by either supervision or fear of loss. Lastly, he criticizes the media: “in the bubble years, everyone becomes a cheerleader, including the media.”

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