On Nationalization

I’m a little late getting to read this very provocative new Atlantic piece by a former chief economist at the IMF, but it is an absolute must read as we continue to flinch at these massive banks and their massive problems. It has also been making the rounds and causing quite a bit of secondary discussion on most of the good blogs. I’ll let this summary do the work and hopefully pique your interest:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

And I agree with Erza Klein, that this is probably the most important line in the whole thing:

Anything that is too big to fail is too big to exist.

The Quiet Coup ( Simon Johnson @ The Atlantic )

hat tip: Dario

Dangerous Business

I was reading this post about how nationalization of certain banks could play out and the challenges Obama faces in devising a viable solution for the banking crisis. Suddenly a quote from Lord of the Rings popped into my head: "It’s a dangerous business…going out your door. You step out onto the road, and if you don’t keep your feet, there’s no knowing where you might be swept off to."

Dangerous business , indeed:

The nationalization conversation has, probably rightly, proceeded from the premise of what policy is most likely to work. But in the White House, the principals are also presumably considering the costs of failure. And the failure of a policy of nationalization is a scarier prospect than the failure of a toxic assets strategy. The Obama administration would own nationalization — and its attendant effects — in a way that they’re unlikely to own a less aggressive intervention. Encouraging private investors or buying toxic assets still feels like management of the Bush administration’s crisis. Nationalization, conversely, is the Obama administration’s choice, and a seemingly radical one (how different this might all be if it were called "receivership!"). If it fails, the failure will be chalked up to "nationalization," not, as it currently is, to the financial crisis. And beyond tarring Obama, it will also tar government action: Fairly or not, the verdict on nationalization will be a verdict on the capacity of government to respond to crisis.

On the other hand, inaction isn’t an option either. If the Obama administration can’t fix the banks, it can’t fix the economy, and if it can’t fix the economy, it can’t succeed. So it’s a process of weighing the chances of success against the costs of failure. Skittishness is understandable. It’s hard to think of anything more politically risky, both for the Obama administration and for progressivism, than nationalization.