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I interviewed two leading economists to find out. On Tuesday, when the “partial nationalization” of some of our country’s largest banks was announced, Henry Paulson’s most widely circulated quote was “Government owning a stake in any private U.S. company is objectionable to most Americans – me included…” But the alternative, no credit in the market, is “totally unacceptable,” according to Paulson. So what does this mean for us, American taxpayers?
Announcing the deal, Paulson explained, “…Treasury will make $250 billion in capital available to U.S. financial institutions in the form of preferred stock. Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that Treasury holds equity issued through this program. In addition, taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions…”
I asked Linda Bilmes “what does partial nationalization mean-- is it a fair description”? Bilmes, who is a Harvard professor, former Assistant Secretary and Chief Financial Officer of the US Department of Commerce, and co-author of the Three Trillion Dollar War said “I think a lot of the buzz words floating around are completely wrong." The “bailout plan,” she noted, is not really $700 billion, it’s not a bailout, because it’s basically going to shore up the financial markets, and it’s not to Wall St. Ownership has been so disaggregated from the housing stock, she noted, it’s hard to say who owns what. “It’s us, it’s pension funds, a lot of institutional investors.” Put this way, we all have a stake in the bailout plan, even if it scares us.
On her blog, EconomistMom explained, “What makes it “nationalization” is that the federal government is effectively taking ownership of private equity.”
I spoke with Diane Lim Rogers, who is chief economist at the Concord Coalition and writes the great blog EconomistMom. Like Bilmes, she stressed that while the government is spending money it doesn’t have on the bailout bill, getting credit moving is key. She also stresses the need to seriously overhaul the U.S. financial system after we stem the current bleeding. And, as a “progressive deficit hawk,” she is supporting Barack Obama on November 4, because she feels he and his team have a more realistic plan to deal with the current, and future, financial crises.
Bilmes summarized the situation that led to the bank rescue plan succinctly: the story with the banks is that the credit markets have seized up because if the banks won’t lend to each other; then the whole system comes to a halt. Normally, Bank B lends to Bank A (and vice-versa), they lend to each other and that’s how they always cover each other. And they never know what their day-to-day needs will be…because businesses run on working capital, and so businesses will have different needs each day. One month a small (or large) business may be flush, and another they may need to access a line of credit. They need to go the bank when they need it. The only way this system works is if banks can lend to each other.
She notes of the bank plan, “I see it effectively as providing a sort of insurance to the banks. We’re saying to banks: we are putting a bunch of money in this bank. We are putting a bunch of cash on deposit. We’re going to give you guys all some money on the basis you start lending again.”
Bilmes noted also, “I don’t see it as nationalization- that’s a pejorative (in this country- Ed.). The Government is using cash (we don’t have) to essentially prop up the banking industry to provide lines of credit so businesses don’t fail. They are doing whatever it takes to keep credit flowing.” She believes the Feds are looking at what happened to Japan in the 80’s, when ironically the U.S. Government counseled against such drastic action. The Japanese economy eventually recovered, but the banks, she says, never recovered.
What happens now, I asked her? How do we ensure that credit does indeed get moving? “Nobody really knows. We absolutely need to get credit moving, quickly and fast. The theory is: we are all now shareholders, that’s where the nationalization comes in. We’ve bought a stake in these banks…much as the government
