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.
Article comments
— go to most recent comments1 - Al Barger
Or Plan B- The feds do NOTHING and the bad banks go bankrupt like they should. Investors take their hit betting on the wrong horse, and people get their loans from the majority of banks what have not run themselves bankrupt.
Depositors are guaranteed by the FDIC already, but even if the feds picked up some of that, it'd certainly be cheaper than these trillion dollar power grabs.
Your article seems to be based on the premise that the choice is between bank nationalization versus more of these adhoc TARP things - in which case nationalization might not look so bad, relatively speaking.
But the feds have done enough damage already. Notice how the market loses a big bunch every single time they've come through any of these stupid emergency bills, TARP, the stimulus package, Obama's talk on a mortgage bailout?
It seems that more than anything at this point, it's the uncertainty of the guvment moving the frickin' goalposts every few weeks that's keeping things torn up.
And just the talk of nationalizing banks is enough to have the whole financial sector absolutely in the toilet. What private investor in their right mind would be investing in banks if the feds are liable to take them over and make up new rules next week?
2 - Dave Nalle
Basically, if Paul Krugman is for it then it has to be a bad idea, since Krugman's idea of improving the US economy is to get rid of whatever vestiges of capitalism remain and reoplace them with central government control of the entire economy, because he's a big, anachronistic, socialist stooge.
Dave
3 - handyguy
It's not true that 'every time' a large government intervention is tried, it fails. The Savings & Loan debacle of a couple of decades ago was solved rather thoroughly via just such intervention.
The original Chrysler bailout was paid back with interest....the government made a profit on the deal.
It's possible for the government to do intervention either well or badly. The people who are claiming that the situation will right itself and that the government should stay out -- well, they don't necessarily know a bit more about it than those who favor intervention. [They do have very loud voices, but this is not a point in their favor.]
But the interventionists won the election. There will be a government banking intervention. So maybe it's better to concentrate on doing it right rather than bemoaning the fact that it is being done at all.
The system is frozen and on the verge of massive failure. Just waiting it out would be irresponsible.
4 - Dr Dreadful
Whatever it is Dave's been chugging this weekend, perhaps he can let me know where I can get my hands on a bottle of it.
5 - Dave Nalle
It's called despair, Dr. D. Your portion will be served out soon enough, I'm sure.
Dave
6 - Joanne Huspek
It's an interesting concept that might work but when and where do we draw the line? Where does the government intervention end? I hope it would be spelled out a bit more than what went on with the TARP package.
The other thing I wonder about is why are a majority of credit unions solvent and/or making money? Could it be a difference in operations?
7 - Arch Conservative
Nalle had it right..........
Krugman is a world class douchebag.
8 - bliffle
Yes, credit unions are run very differently. When they are chartered they have very different goals, i.e., they are run for the benefit of the members. Often, there are state and federal laws that define their activities. The employees are employed by the members, often having previously been members, and the Board Of Directors consists of members.
Credit Unions are run for the benefit of the members who have their money in the CU, not for the benefit of stockholders.
9 - Arch Conservative
But hey...when we discuss economics on this site most of us are always taking the macro approach and debating the policy of the stooges in DC who claim to know what's best for all of us.
Rarely is it that any get into any personal finance issues and share with one another. With what's sure to be rough times ahead for many Americans of all political persuasions I believe it would be an excellent idea if the editors of this site decided to create a new Personal Finance Forum where we can all cast the politics aside and share with each other experiences and advice that will help us all get through the dark days ahead.
I hope that others will think that this is a good and worthwhile idea. If we can do Glosslip, we can do personal finance.
10 - Cindy
Arch,
What a great idea!
11 - handyguy
Dave says 'despair' is the reason he has reduced his recent contributions to the comments section of several articles to deep dark cynical one-liners. [Sometimes two-liners.]
Might I suggest to our scowling, sputtering friends on the right that any president, left, right or center, libertarian or socialist, militarist or pacifist, would be facing a gigantic, daunting set of problems right now.
And that reflexively rejecting every plan, potential plan, appointment, speech, press conference is just possibly not the healthiest way to react to a presidency and a nation facing a crisis.
Painting a president as a buffoon when he quite obviously is not one, caricaturing all his policies as "leftist/Marxist/radical" etc, when they are obviously based on strong advice from very skilled and experienced advisors [leftist only when compared to the extreme right] -- well, doing that over and over again does not change the truth.
And you're in danger of making yourself into cartoons even as you try to distort and oversimplify White House policies.
So cynical, so ugly, so unnecessary.
12 - Arch Conservative
Thanks Cindy.
When Bliffle and Joanne were discussing the credit it unions it reminded me that a family member recently suggested I join one.
My wife and I plan to join one in the hopes that we can get a better rate on our checking and savings accounts. We also plan to refinance an automobile loan at a lower rate that will save us hundreds if not thousands.
It's sad that not too many people realize how credit unions can help them save as well as other ways to save money and cut costs.
When it comes to personal finances we must be as proactive as possible and not rely on the federal government to throw a few extra pennies our way and expect us to act as they did us some huge favor. Most of us, not being independtly wealthy and not having the time to research all of the options, could benefit from sharing ideas with each other on this website. With the way things are going right now I'm sure there'd ample interest in starting a forum devoted to personal finance.
I really hope that other posters will lend support to this idea and that the editors will give it serious consideration.
13 - Roger Nowosielski
I suggest the following website as one guide to investment and control of one's resources in these uncertain times: Solari Real Channel.
14 - Al Barger
Handyguy sez The people who are claiming that the situation will right itself and that the government should stay out -- well, they don't necessarily know a bit more about it than those who favor intervention.
Absolutely right. I have some idea of some of what has gone wrong, but I don't claim to begin to understand it all. But neither do the financial experts much less the general public.
This is exactly the main argument for doing nothing - on the government level. Individuals have a good idea of their personal situation, their levels of debt and what they need to keep their businesses going. But no one could possibly understand all the things going on to come up with a fix from the top.
The solutions to working our way out of this mess are going to come from tens of millions of people fixing their own little corners - but that's going to be much more difficult and drug out the more we get hamstrung with stupid government fixes and throwing on trillions of dollars of new debt on top of what is largely a debt crisis to start with.
15 - Cindy
Arch,
I think that if they did that idea it might be a big draw for people to blogcritics. A lot of people are out there probably looking for a place to find that sort of information now.
16 - Dr Dreadful
There is already a BC Forum. I'm not clear on how it works, but I think all that would be necessary to get a Personal Finance topic started is for someone to step up and be willing to act as moderator.
17 - Cindy
I think Christopher said it doesn't work? Too much spam or something?
Then Jet talks about using it. So, I don't really understand.
18 - bliffle
Credit Unions work well. They call into question the whole idea of shareholder banks. It seems that selling stocks in banks has not been a good idea, for either bank members, or, lately, shareholders.
19 - Tommy Mack
I want to put something else in perspective -- what a billion is.
A billion is a difficult number to comprehend. In science and engineering a billion is written as 10 to the 9th power, in scientific notation. It is a thousand millions " 1,000,000,000,000.
Here is another way of putting that figure into some perspective.
• A billion seconds ago it was 1959.
• A billion minutes ago Jesus was alive.
• A billion hours ago our ancestors were living in the Stone Age.
• A billion days ago no-one walked on the earth on two feet.
• A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.
I hope this helps. By the way at trillion is 10 to the 12th power.
Tommy
20 - Roger Nowosielski
The Dow closed at 7114. I always believed it ought to have stayed at about 7 thousand, that anything above was artificial. We'll see whether the 7000 barrier will hold. If not, look forward to a collapse.
21 - Roger Nowosielski
the story
22 - Dr Dreadful
A trillion:
My political science professor a few years ago framed the concept thus: if you were to take a trillion $1 bills and stack them up inside standard railroad freight cars, the train would stretch from Fresno to Los Angeles.
23 - Dr Dreadful
BTW, Tommy, you're correct that 1 billion is 10 to the 9th power, but the number you wrote out is actually 1 trillion.
24 - Roger Nowosielski
I think it would simplify matters if we substituted a $100 bill for the buck. The dollar is no more than a dime used to be. It won't even buy you a cup of coffee at Lyon's, and their coffee is lousy.
25 - Tommy Mack
On this date in history in 1995, the Dow Jones (DJIA) industrial average closed above the 4,000 mark for the first time.
Here are some other interesting dates and averages. * is for the first time.
1989 May 19, DJIA passed the 2500
1993 May 19, DJIA closed above 3,500*
1995 Nov 21, DJIA closed above 5000*
1997 Feb 13, DJIA average broke through the 7,000 barrier*
1997 Jun 16, DJIA climbed above 8,000*
1999 May 7, DJIA closed at a record 11,031.59.
2002 Oct 9, DJIA fell 215 to 7,286
2006 Jan 9, DJIA closed above 11,000 since Jun 7, 2001.
2007 Sep 18, DJIA closed at 13,739.39.
2008 Mar 11, The US Federal Reserve and other central banks said they will pump $200 billion into the financial markets to help ease the strain from the credit crisis. Wall Street rebounded with its biggest rally since 2002 as the DJIA rose 416.66 to 12,156.81
Tommy