Moue Magazine

No, not that one. The “N” word in question is “Nationalization”. President Obama spoke to ABC News yesterday while visiting Fort Myers, Florida (my hometown aka foreclosure central) and discussed why he doesn’t think we should follow in Sweden’s economic footsteps: 

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country. And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.

Obama doesn’t want to follow the Swedish model because a) our banking system is much larger and b) that just isn’t how Americans do things. The first reason has more weight than the second but it too has flaws. The reform would be focused on a small part of the banking system rather than the whole. As Paul Krugman notes “the Geithner plan, such as it is, already acknowledges this: the “stress test” is to be applied only to banks with assets over $100 billion, of which there are supposed to be around 14.” Fourteen banks is as manageable as the five Swedish banks were. And our current president (unlike the one before him) is smart enough to understand that. Which makes it interesting- in a not particularly good way- to see him using it as an excuse. 

Krugman goes on to point out that the “that just isn’t how Americans do things” argument doesn’t hold much water since the bailouts are extremely unpopular among the public and the FDIC takes small banks into receivership every week. Bank nationalization- in the Swedish sense- is already taking place in the U.S. on the micro-level.

Here is a description of how the FDIC acts as a receiver (pdf link): 

A receivership is designed to market the assets of a failed institution, liquidate them, and distribute the proceeds to the institution’s creditors. The FDIC as receiver succeeds to the rights, powers, and privileges of the institution and its stockholders, officers, and directors. The FDIC may collect all obligations and money due to the institution, preserve or liquidate its assets and property, and perform any other function of the institution consistent with its appointment.

A receiver also has the power to merge a failed institution with another insured depository institution and to transfer its assets and liabilities without the consent or approval of any other agency, court, or party with contractual rights. Furthermore, a receiver may form a new institution, such as a bridge bank, to take over the assets and liabilities of the failed institution, or it may sell or pledge the assets of the failed institution to the FDIC in its corporate capacity.

Hmmm…the FDIC can merge a failed bank with another and form a bridge bank. Which is (essentially) what they did in Sweden.

The FDIC was created in 1933 to deal with the bank runs that were caused by investor fear that banks would fail and take their money with them. Nine thousand banks failed before the FDIC was founded- and that was only a third of the market. 

The banking system has been bloated before. Bankers have been greedy and irresponsible before. We combated these by allowing a government created agency (the FDIC) to step in and do what it needed to in order to clear the path of zombie banks. The number of banks decreased and the economy not only survived, it got stronger. And all of this happened without printing currency with Karl Marx’s face on it.