“Why this bailout is as bad as the last one,” by Jeffrey Miron
No to Bank Nationalization, Partial or Complete
2 Responses to “No to Bank Nationalization, Partial or Complete”
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“Why this bailout is as bad as the last one,” by Jeffrey Miron
Here’s a counterargument to Miron — I am something of a devil’s advocate here, because I am sure he’s right that the Feds will make things worse in many respects. But I think he’s partly wrong.
1. An injection of preferred stock isn’t supposed to go to insolvent banks, only to illiquid ones, i.e. those that are salvageable. Treasury & the Fed might in fact be better able to identify these than private investors. Presumably they have better access to banks’ records.
2. Taxpayers are less at risk with this approach (as opposed to buying toxic assets) since they benefit if banks succeed & their value rises. The toxic assets are less likely to rise enough to cover taxpayer costs, and have to be bought at well above current market value if the purchase is to have any effect on banks…almost guaranteeing taxpayer losses.
3. Properly designed, the preferred shares injection approach keeps govt from meddling in day-to-day bank operations. Preferred shares are non-voting.
Hence, on the blackboard at least, a properly designed and executed equity injection is superior to the frankly crazy bailout initially proposed. There’s substantial experience around the world with these sorts of debacles, and properly done, this sort of plan can minimize damage to citizens and taxpayers.
Whether such a fix is less harmful than simply allowing things to progress (system feezeup & bankruptcies) is unclear. It depends on the magnitude of the banking problem; economists I’m familiar with who track this stuff seem to think a fix would avert a long depression. If so, I can uderstand the argument for this sort of plan as an emergency measure.
But I keep saying “when properly done”… properly shmopperly, the rent-seekers in Congress, administration, bureaucracies, banking industry, and private citizens are battling to see who will be forced to bear the losses. If a “properly designed and executed” plan emerges from such a process, it’s pure luck.
The problem with trying to say what should be done (including nothing) is that the status quo isn’t the free market; the argument revolves around which kinds of intervention are less harmful. That’s not easy to determine, especially when political reactions are considered.
The one thing no one is proposing is the fix that would prevent *future* disasters of this sort: ending the government’s ability to expand credit at will (and ending its irresponsible fiscal policy in the process).
Thanks for the thoughtful remarks, Charles. The issues are indeed complex and there are better and worse (or maybe worse and even worse) ways that such things can be done (or not done). The dangers of political manipulation of the banking system, beyond the astonishing manipulation we have already become accustomed to (and which contributed to the current crisis — including the setting by federal authorities of specific percentages of mortgages to be finance for specific categories of purchasers), is quite serious. On my last day in Belgium (yesterday), I watched the BBC while packing and they were promoting an end to mortgage foreclosures by Northern Rock, which is now state dominated. After all, we will just have to pay them welfare if we don’t let them reneg on their mortgage payments, so it’s a wash, right? Here’s a story on the issue: http://www.bloomberg.com/apps/news?pid=20601102&sid=aa1S6BajBGpo&refer=uk
Such political pressures will be very hard for state owners to resist, and not only from distressed homeowners with problems paying their mortgages, but from huge businesses with lobbyists up and down K Street in Washington, D.C.