Because we're not Sweden.
Tyler Cowen runs through the major objections here. My thoughts are less specific: what works in the banking system of a small economy does not necessarily work in a large one. For starters, no offense to the Swedes, but very few other countries are affected by what happens in their economy. One family, the Wallenbergs, indirectly controls something like 30-40% of Sweden's GDP. Even now, the Swedish financial system is considerably less broad and complex than that in the US; it's not a world financial center. And in 1992, everyon's financial system was a whole lot less complicated than they are now. The FDIC was an excellent solution for commercial banking (and yes, to all those wondering what happened to the "real libertarian" Megan, I've been saying this for years.) But its model is not applicable to a world of credit derivatives and broken broker-dealers.
Possibly the biggest problem with this plan, among many, is that Sweden is essentially able to command the labor of its bankers; they have relatively few alternatives without starting over in a new country and a new language. American government has no such leverage. Yes, the folks in the mortgage departments royally screwed the pooch, but running a major bank is not something you can hand over to a GS-17. Nor is it a job for academic economists.
And, of course, the political ramifications in the United States are very disturbing. A small homogenous country with a parliamentary system and a lot of social capital invested in the government is going to do better at nationalizations than we will. The fractious structure of the American legislative system means--as we've just seen--that huge amounts of political maneuvering and log-rolling will go into the running of any national banking system. Imagine the banking system run by the Department of the Interior.
One readers asks if I'm not, by endorsing the modified Paulson plan, endorsing the failed Japanese model over the Swedish system. Rather the reverse. The problem with the Japanese system (or at least, one major problem) is that for political, social, and career reasons, banks kept pouring money into zombie firms, trying to salvage the bad loans of a decade ago. Is a nationalized banking system less or more likely to do this than a private one, in America? I imagine any banking head, appointed or career civil service, would get a lot of calls from Senators and congressmen demanding that the bank prevent companies in their districts from going under.
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I imagine any banking head, appointed or career civil service, would get a lot of calls from Senators and congressmen demanding that the bank prevent companies in their districts from going under.
Did congresscritters prevent Wachovia from being folded into another bank? WaMu? IndyMac?
I don't think a plan identical to that hatched in Stockholm in the early 90s is the way to go, but I think its general principles -- adapted to fit US business culture and economics -- is worth considering. The way I see it, government would avoid taking majority ownership shares in any troubled financial institutions. When minority share capital injections won't suffice, the government could arrange for mergers/acquisitions.
For starters, no offense to the Swedes, but very few other countries are affected by what happens in their economy.
That's an argument for getting it right. It's not an argument against Swedish-style bank restructuring.
"but running a major bank is not something you can hand over to a GS-17."
And why not? It's not like they could reasonably do any worse than the people running them right now.
This is the sort of utterly infuriating and nonsensical statement that makes it clear you have no logic behind your positions, Megan. You say you don't trust government GS employees to run a bank, but you do trust the government to hand those banks a $700 billion blank check drawn on the taxpayers of this country. Whiskey. Tango. Foxtrot. Over.
Interesting ... looking through portfolios' wreckage today - the one standout that stayed in the green (just barely) - CPB (Campbell's Soup). Stop-losses were falling so fast today ... it's beyond cliches.
And in 1992, everyon's financial system was a whole lot less complicated than they are now.
No doubt true. But I think that's an argument against the government's getting involved in the minutiae of mortgage-banking, asset marketing, property management, and salary negotiations (in other words the Paulson plan). Simple equity purchase-style recapitalization -- at least when such purchases keep the government in the minority and permit professionals instead of government bureaucrats to bring the bank bank to profitability -- sounds simpler and more straightforward to my ears than the monstrosity that just got voted down. I basically want the government bank restructuring efforts (WaMu, etc) of the last few months to continue, but in concerted, organized fashion.
Travis, as far as infuriating ideological statements go, the idea that a GS-17 who has never managed anything larger than a fifty person division could take over, say, Wachovia is much stronger. Running a bank is not like running a bake sale, and you can't just hand the job over to a bureaucrat with a vaguely related job title--any more than you could make the Marietta, Georgia police chief the head of the armed forces. There is no one in government with the relevant combination of deep specialized knowledge and managerial experience, except maybe the people running Fannie Mae, and they're . . . running Fannie Mae.
The fractious structure of the American legislative system means--as we've just seen--that huge amounts of political maneuvering and log-rolling will go into the running of any national banking system.
Megan: the government need not run "the national banking system" any more than it already does under a modified Swedish plan. My understanding is that plenty of US financial institutions are in decent shape. They won't need government cash. Many that do require assistance won't need so much as to be bought out of existence, but will continue to run their own affairs. It's just that among the recipients of dividend checks will be the United States Treasury. And the legislation could (and I would say must) require the government to divest itself of shares in the fullness of time (and indeed could allow for corporate buybacks at fair market prices). In other words, the legislation would ideally make nationalization temporary. And even during nationalization, the banking system will still largely be in private hands, and under private management.
I am confused by this statement from Tyler Cowen: "The U.S. doesn't have any tradition of successful nationalization."
Does the U.S. have any tradition of nationalization? All I can think of is TVA and some temporary seizures during war (railroads) or insolvency (S&Ls and banks). In any event, the takings clause would require just compensation, which doesn't strike me as cheaper than the bailout.
Running a bank is not like running a bake sale, and you can't just hand the job over to a bureaucrat with a vaguely related job title--any more than you could make the Marietta, Georgia police chief the head of the armed forces.
In fact the UK does this sort of thing, see Northern Rock. A person is brought in from the civil service or from the private sector and given a commission to sort a nationalized bank out. Once the bank is healthy again, it is sold off at a profit. At least this way the tax payers get the good assets of a bank as well as the crap, as opposed to the recently departed plan.
Oh, and I dare say that a lot of GS-17s manage more than 50 people. My father worked his way up from mechanic to GS-14, and he was managing 150-200 folks, who in turn were managing other workers.
Marky Mark's family controls the Swedish economy? Who knew?
Where are the people on this site who more or less said that Wachovia would be perfectly safe, was not going to fail? Why is a pundit who suggested that banks were not in trouble, just investment banks, even writing for The Atlantic about economic and public affairs in the first place?
Megan,
Thanks for talking about this. I was wondering what the criticisms were of the Swedish model. However, are large numbers of employees — not just upper management, which is often fired when insolvent companies are nationalized — voluntarily leaving AIG, Fannie Mae, and Freddie Mac? My impression is that Wall Street is shedding jobs. Why are all these bankers going to leave their comanies after a public takeover when jobs on Wall Street seem hard to come by? And who's going to expand their workforce right now by hiring them?
If we prop up the financial industry we will be creating our own zombie firms — zombie financial firms. If, after $700 billion, JPMorgan Chase or whoever says, "More," politicians will once again take to the airways and the newspaper columns to insist that, once again, we pour more money into these zombie firms.
Action is needed, but the current bailout is not the best way to spend $700 billion. Also, after a public takeover of an insolvent firm, the goal is to give the Treasury Dept the autonomy to re-capitalize and re-privatize the company once it recovers (or sell off its assets if it can't). The bailout that failed today, the one you support, gave the Treasury Dept even more autonomy, to decide who wins & loses, and how much in stock warrants the US government gets in return.
You're arguing that you trust Paulson to spend $700 billion, to pick who gets how much, but you don't trust the Treasury Dept to run a failed bank? That you'd rather leave the failed banks in the hands of the executives that made the bad investments and simply pump more money into them? Fool me once, shame on you, … fool me can't get fooled again!
"In fact the UK does this sort of thing, see Northern Rock."
Maybe we could just outsource it to the British if we can't seem to be responsible enough to elect people capable of the task?
Did congresscritters prevent Wachovia from being folded into another bank? WaMu? IndyMac?
Megan: I read the point the words above responded to too quickly, so my response made no sense. My bad.
Martin, you miss my point, which is my fault for not explaining fully.
Nationalization here is a bit like receivership, except longer term. But the key is the government takes control of the institution, performing assets and non-performing, and also of course gets the banks books. This is entirely different than buying up bad assets at taxpayers expense, while leaving good assets in the hands of the very people who screwed up in the first place. And there is no bizarre reverse mortgage to try to determine what assets are worth ... the government knows! But different to the Swedish system, the ultimate goal is to get the bank in private hands once its stable and taxpayer investment has been returned.
MEGAN: I'm not sure what you envision Nationalization to mean in your post.
It seems like you imagine a nationalization to involve firing everyone who works at the bank now, and then hiring new government workers to come and take their place.
You would just keep the current workers on, and pay them their current salary.
The major differences would be:
1. Equity holders are wiped out
2. Debt holders would have some % of their money converted to Treasuries
3. Assets of the bank would be turned over to USG, where they could write them down as they wanted, or not.
4. Liabilities would also be turned over to the USG, so key counterparties would be paid with freshly minted Federal Reserve Notes.
5. Eventually, they would be returned to the public, or wound down.
This capitalizes banks, eliminates moral hazard, and stops counterparty risk sparking a broader bank run. It's also transparent and easy to understand -- big improvements over the current proposals (which have none of the benefits listed above AND is equally riddled with Government involvement)
-winterspeak
And as for Tyler, if he wants to see a good response to the "telling" argument that "we would all be better off if high schools taught the Modigliani-Miller theorem", he should simply look at the Modigliani-Miller theorem itself. Wikipedia has the details, since he clearly needs an update.
Applying MM to a near-bankruptcy, information asymmetric is Fraudulent. Moreover, it capital structure does not matter, then why NOT take equity to pay for the cash infusion? It boggles the mind that someone raises MM and then argues FOR a particular capital structure. Complete Fraud.
-winterspeak
If the current crop of generals had just gotten the armed forces destroyed and lost every battle fought, you might consider giving that police chief a try. He literally couldn't do any worse.
You seem to be quick to denigrate the experience of "bureaucrats." Paulson was CEO of Goldman Sachs, and I'm sure a great many high-level bureaucrats similarly came from professional careers in private industry. I don't think they're necessarily as unqualified as you seem to think they are.
Don't extrapolate the tragi-comical history of the staffing of the Coalition Provisional Authority in Iraq with low-level political hacks and wet-behind-the-ears neocon greenhorns with how any government-managed operation would be run.
but running a major bank is not something you can hand over to a GS-17
besides the fact that the GS sked only goes up to 15 (after that it's something called SES - Senior Executive Service for career employees), I'm calling shenenigans.
a top grade GS/SES normally has in excess of 20-25 years of experience and has held a great deal of responsibility at various times in their career. It is not outside the realm of the possible for a career Treasury employee to run a bank. Lots of CEO's of ginanormous corporations are sucessful with less age and experience.
Travis, as far as infuriating ideological statements go, the idea that a GS-17 who has never managed anything larger than a fifty person division could take over,
I didn't catch this follow on comment before I posted. If you think this is accurate, there is a gap in your knowledge level on the nuts and bolts on how the federal governemnt works. You are really underestimating the level of responsiblity of a senior GS /SES - it's pretty much equivalent to an Admiral or a General.
I don't understand why having the US gov buy common or preferred shares of stock requires the gov to manage the affairs of the company directly any more than pension funds or mutual funds or, heck, Aunt Rita manage the companies in which they invest. Passive equity investors delegating authority to professional managers is a funamental principle of corporate finance. Megan's objections are sufficiently vague and weak that they appear to be a cover for mere ideological/aesthetic discomfort. I'm not denying that there could be persuasive objections, but these don't cut it.
Yes, they are very good at working for the government. That is not the same thing as working for a private company. The same is true in reverse, which is why so many appointees tend to flame out spectacularly.
I'm not assuming you fire the bank tellers and loan officers, but a nationalized bank is not going to, for example, employ the same senior managers or risk management officers as a private bank.
Liberalrob, the statement that "they literally couldn't do any worse" comes from not having a comparison class of people who are not industry professionals. Go take a look at banking in a country where people with vaguely related degrees are put in charge of the banking system because of political connections. it is very, very possible to do much worse than our bankers did. That's like looking at a doctor who screwed up your surgery and deciding to have the security guard operate next time because he couldn't do any worse. I pretty much guarantee that if you or I were suddenly put in charge of a bank next week, we'd run it into the ground in eighteen months. The denigration of managerial talent is the liberal version of the conservative belief that pointy headed intellectuals get too much say in how things are run just because they happen to have a bunch of degrees in the subject.
I still just think your underestimated the amount of overlapping knowledge between 'industry professionals' and specific public employees. I'm not talking about puting EPA scientists or Postal workers in charge.(or Admirals or Generals). I am talking about senior career Treasury department officials (and associated regulatory agencies), some (most?) of whom presumably have finance degrees (or the like) and a 'lifetime' of working close to the banking and financial industries. To assume they're all generic bureaucrats is incorrect. Remember that O'Rourke book (parliment of whores I think) where he goes to the DOT expecting one thing, but he winds up meeting a buch of gear heads?
Now, I'm not a fan of a nationalization scheme for the first reason you state: size matters. I iniuitively don't think what worked for a 300 billion economy with 9 million people is going to work with a 14 trillion economy with 300 million people.
Possibly the biggest problem with this plan, among many, is that Sweden is essentially able to command the labor of its bankers; they have relatively few alternatives without starting over in a new country and a new language. American government has no such leverage - Megan
Right. Because if we nationalize our banks, the bankers will all just move to...uh...Bangalore or something.
Come on. You know what kind of pay cut an American banker takes when he moves to a European bank? How many jobs are going to be available in Hong Kong or London in the current environment? Did you check out the Hang Seng today? Where is it exactly that you think American bankers will take their skills to if the US government nationalizes American banks tomorrow?
Swedish bankers, you may note, speak English. It is Scandinavian countries that need to worry about driving their skilled professionals to the US with overly restrictive regulatory policies, not the other way around. And yet they seem to have weathered things just fine.
Come on, brooksfoe. Do you know what kind of pay cut an American investment banker takes when he moves to a Federal Civil Service job?
By the way, what makes someone who likely declared elsewhere that Americans are "a nation of immigrants" suppose that Americans are less likely to emigrate again to escape a repressive government that robs people of freedom and opportunity than, say, Swedes?
Micha, I have friends who rejected jobs at ABN-AMRO that paid a third to a half what they made in comparable jobs in the US. All across the Dutch banking sector you see the threat of people leaving. Why? Because they have the "CAO": a national collective bargaining system that sets salary ratios across professions. Executives can't exceed their pay caps. They're paid nothing like what US execs make. There's still a social contract with moral power that keeps them in Holland. But obviously they speak English and could easily leave for the US, whereas Americans don't speak Dutch (or Swedish, or Mandarin) and have a harder time fitting in within the home-country HQs of non-American banks, where the national language often serves as a tacit barrier keeping foreign employees from rising to high leadership posts.
What Megan wrote here doesn't make any sense. It gets the brain drain risk backwards -- if any country can afford to nationalize its banks without risking much of a brain drain, it's the US, not a small European country.
And here's the other thing. With Treasury and the Fed today taking action to basically print hundreds of millions of dollars and extend it in credit lines to banks, we're talking about solutions in the high hundreds of billions of dollars to try and get the credit system flowing again but with no guarantee that they're actually going to work. We're basically pumping money into banks in different ways -- be it the Paulson plan, which would/would have spent $700 billion to buy up risky mortgage-backed securities, or the Krugman idea of buying up equity to recapitalize banks, or the House Repub mortgage-insurance idea to hopefully increase the value of the securities, or whatever -- in the hopes of massaging banks to the point where they start to regain confidence in each other, so they'll get credit flowing again. But we don't know if they will. They may stay paranoid. And then we've thrown money after a mirage.
At some point, don't you have to say: enough. If you won't start lending to each other, we have to take you all over and start lending to each other. We'll run the operation at a loss for a few years, sell off your bad assets to get prices all discovered up, and then, once things are secure, we'll gradually re-IPO you. You serve a crucial public function. You are no longer able to perform that function. We cannot convince you to perform it through blandishments and neat prizes. So we are seizing your asses and performing your public function while we put you into rehab, and when the therapists let you back out, then you can have the keys back.
McArdle: One family, the Wallenbergs, indirectly controls something like 30-40% of Sweden's GDP.
From the Economist: By the late 1990s the Wallenbergs controlled some 40% of the value of the companies listed on the Swedish stock exchange.
Now, I wonder if McArdle know the difference between GDP and the value of the stock exchange.
The estimate was 30% *of GDP* in 1990; it is supposed to have grown since then. Hence, 30-40%, 40% being the upper bound provided by the outdated stock market data.
Thought experiment: what are the odds that I managed to get an MBA from Chicago, spend six years econ blogging, 4 years writing for the Economist, and eighteen months writing for The Atlantic, without learning what the components of GDP are?
Hmmm. Dunno. They let Andy Sullivan write for the Atlantic, still, sooooo....
Speaking of Swede's social capital in their govt, part of the US problem could be utter lack of trust in the outgoing govt. The buildup to this bailout was unfortunately too similar to Iraq war. That undermines any credibility the 'bailout' was going to have.
Whether this is another bad judgment from the govt or a bad call on the part of voters & congress, we dont know yet. But I certainly think a bit of trust in govt might have actually helped a constructive debate on this and solid action. No way now!!
Thank god no one comes here for informed comment on economics.
"Thought experiment: what are the odds that I managed to get an MBA from Chicago, spend six years econ blogging, 4 years writing for the Economist, and eighteen months writing for The Atlantic, without learning what the components of GDP are?"
You couldn't even get Goldman Sachs to bet on it, let's put it that way.
about Paul Volcker's career Wikipedia says:
"In 1952 he joined the staff of the Federal Reserve Bank of New York as a full-time economist. He left that position in 1957 to become a financial economist with the Chase Manhattan Bank. In 1962 he joined the U.S. Treasury Department as director of financial analysis, and in 1963 he became deputy under-secretary for monetary affairs. He returned to Chase Manhattan Bank as vice president and director of planning in 1965.
From 1969 to 1974 Mr. Volcker served as under-secretary of the Treasury for international monetary affairs. He played an important role in the decisions surrounding the U.S. decision to suspend gold convertibility in 1971, which resulted in the collapse of the Bretton Woods system. In general he acted as a moderating influence on policy, advocating the pursuit of an international solution to monetary problems. After leaving the U.S. Treasury, he became president of the Federal Reserve Bank of New York from 1975 to 1979, leaving to take up the chairmanship of the Federal Reserve in August 1979."
Are we supposed to think there are no Paul Volckers out there any more? an absolute government/private dichotomy is a bit of a red herring.
"Sweden is essentially able to command the labor of its bankers; they have relatively few alternatives without starting over in a new country and a new language"
Remember, all upper-middle-class Swedes speak fluent English.
This means that the barriers in moving from Sweden to London (legal and cultural) are rather smaller than the barriers in moving from the US to any European financial centres - and the barriers in moving from Sweden to Hong Kong, Mumbai or Dubai are no different from the barriers in moving from the US to the same places.
Marky Mark's family controls the Swedish economy? Who knew?
Posted by Mitchell Young | September 29, 2008 4:55 PM
The first name that came to mind for me was Raoul Wallenberg, and HOLY COW! He was one of the Swedish Wallenbergs!
I'm starting to like these Wallenbergs. Maybe we SHOULD imitate Sweden. We have a couple of potential Wallenbergs, don't we? Bill Gates, Warren Buffett.