The Wonk Room

Geithner: Bank Nationalization Is ‘The Wrong Strategy For The Country’

During an interview yesterday with Jim Lehrer, Treasury Secretary Timothy Geithner firmly dismissed nationalization as an option for combating the banking crisis:

GEITHNER: I think that’s the wrong strategy for the country, and I don’t think it’s a necessary strategy. What we need to do is to make sure that these institutions have the resources necessary to perform their critical function on an ongoing basis in our economy as a whole.

Now, Geithner is clearly in a tough spot. Openly musing about whether or not to nationalize the banks can have an effect on bank stocks, and as Matthew Yglesias noted, “while it’s fine if the stock market doesn’t like the idea of nationalizing banks, it’s not fine if the stock market goes into a total panic over it.” So there is wisdom in not parading around the fact that nationalization is being considered.

That said, nationalization needs to be considered, and there’s something wrong if Geithner really believes it’s not an option. Adam Posen, Deputy Director of the Peterson Institute for International Economics, explained the logic of nationalizing to Congress today:

[N]ew private owners will always demand majority voting control and removal of current top management who are accountable for the accumulated problems. The American taxpayer would be ill-served to receive anything less for putting in the vast amount of money needed to restructure and recapitalize [the banks]. And the American taxpayer, just like any acquirer of distressed assets, deserves to reap the upside from their eventual resale. That basic logic is why failed banks that are too systemically important to shut down should be nationalized temporarily.

Geithner’s alternative has the government receiving stock in the banks “just like anybody else,” so there will be a return on the investments. But that doesn’t change the fact that the government would be sinking a lot of money into these banks without gaining authority and accountability over the use of taxpayer funds. The banks could simply work to maximize short-term gains — or throw lavish parties — and there would be very little Treasury could do about it.

In the budget that the administration proposed today, there is a $250 billion placeholder for more bank aid. While it’s admirable that the administration acknowledges that more might need to be done to save the banks, there is no sense in spending this amount of money without positioning taxpayers to reap significant rewards. A situation in which the government is providing a “slow intravenous drip that’s enough to keep the banks shambling along” will hinder the economic recovery and be a tremendous waste of money.