Bank Nationalization and/or Failure are Bad Ideas

The stock market has spoken loud and clear. If we nationalize our banks or let them fail, we can forget about private capital as a source of bank sustenance, probably for a long time. When Congress initially voted down the Troubled Asset Relief Program (TARP) last Fall the market tanked further and faster than ever before in its history, and recent bank nationalizations in England and our own discussions about nationalizing banks here have produced a similar if less violent market sell-off. TARP’s original version of government purchasing toxic bank assets and selling them at auction still offers the best possibility of attracting private capital back into our financial system and probably at ultimately no cost to taxpayers.

Since mid-2007 we have witnessed unprecedented price volatility in our global stock, bond, real estate and commodity markets, which has shaken our understanding of how they work as a group and how they interact with each other. Even our heretofore absolute faith in U.S. Treasuries as the planet’s sole example of a risk-free financial instrument—one upon which all global investments are based-- has been called into question along with the overall credit-worthiness of the U.S. Government. In one year we lost or temporarily saved many venerable financial institutions some of which date back to our nation’s founding, such as Citigroup and Lehman. Investors have lost faith in corporate and political leaders and with good reason. All of these factors have permanently and dramatically increased the perceived if not actual risk of making investments. Americans lost an estimated $11 Trillion in wealth in less than two years. Many will consider long and hard before they make new investments going forward, which will raise the cost of capital and reduce its availability to our financial system.

Wiping out more private shareholder and bondholder wealth by allowing major bank failures and/or bank nationalizations could cause investors to flee the capital markets for years to come. Some version of TARP is probably the answer. It should be perfected and implemented. For those who think bailing out Wall Street and not Main Street is a bad idea, know that there will be not much of a Wall Street or Main Street without the private capital needed to form and grow new businesses that employ our citizens. For those who think bank failures are the necessary cost of capitalism, know that free markets and private entrepreneurship will suffocate without investment capital from our private citizens.