Congress and banking have never been good working partners. Alexander Hamilton conceived the First Bank of the United States to handle the colossal government debt created by the Revolutionary War. Congress drafted and George Washington signed the bank’s charter in 1791. Twenty years later, Congress voted to abandon both the charter and the bank. Today, the government faces another colossal debt that is being created by the US banking system itself because the system is becoming insolvent. Saving the system may well require Congress to nationalize it. They may draft a charter for Barack Obama to sign creating the First Bad Bank of the United States.
Right now the nation's largest banks are carrying half a trillion dollars in bad debt. According to Nobel Prize Winner Paul Krugman, of the New York Times and Princeton University, the idea of temporary bank nationalization has “moved from the fringe to mainstream acceptance.” Krugman championed the cause for nationalization before the Bush Administration began its bungling government-intervention. "The chances of your being able to do this without nationalizing at least a couple of really troubled banks are not too good," Krugman told ABC.
Nor is he alone in that assessment. Economists Matthew Richardson and Nouriel Roubini may not be names that non-economics types recognize but they are of guru status and in agreement with Krugman that nationalization is the only way out of the out of the current financial crisis. The $1.2 trillion subprime mortgage mess is only the beginning of the problem. “Another $7 trillion — including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans — is at risk of losing much of its value,” Richardson and Roubini wrote in the Washington Post.
How big of a hole are the banks in? It is huge, about $400 billion. This includes losses on loans and the drop in market value of the assets they hold but not the federal bailout funds that they got last fall. Nationalization appears to be the only option that would permit solving the bad asset problem on the banks' balance sheets and allow lending to resume.