Is Nationalizing Banks and Mortgage Companies Risky?
Posted February 24th, 2009 by adminEach new term we add to the lexicon of financial disaster is a scary next step into the unknown. Last fall, there was the bank bailout, then the Detroit bailout. Next came the stimulus plan and last week moved from federal loan modification plans to more negative foreclosure news and now the great mortgage bailout. And now the nationalization begins, with a scenario outlined Monday by analysts in which the government could end up with controlling stake in troubled banking institutions. The very word has connotations of the Great Depression and economic disaster. The last time the U.S. nationalized banks, we also faced 25% unemployment, bread lines and questions about the future of our democracy.
Nationalization is scary, but so is the alternative: The malaise and mismanagement we have witnessed since the financial system started breaking down last summer. US Government looks to quell nationalization fears; FDIC says additional mortgage relief and financing aid will hinge on stress test without nationalization yet taxpayers have invested billions bailing out subprime lenders and banks, with precious little to show for it.
Can nationalization be much worse? Granted, there are great risks to nationalization. For starters, there is the basic philosophical quandary. It’s tough for a country to take over a large swath of its banking sector and still tout itself as the first, best bastion of capitalism. Execution risks abound too. University of Chicago business school professor Raghuram Rajan notes that nationalized banks would be subject to political pressures. They might weaken the economy by keeping failing companies alive. And nationalization would amount to a government rescue of bank bondholders, who don’t deserve the help. The economic arguments are persuasive. But they ignore policy realities that indicate a well-managed and limited nationalization effort could be a net benefit. Nationalized banks could serve broader interests, such as increasing lending and providing mortgage relief. The effort to spur mortgage lending has had little discernible effect on private-sector banks.
Taxpayers have invested $350 billion in the bank bailout so far, with $350 billion more on the way. The money has not had the intended effect of spurring lending or eliminating so-called toxic assets. One sign of how this could be different came from Great Britain. Northern Rock, a bank nationalized last year by the British government, on Monday announced a plan to write $7 billion in new mortgage loans this year and nearly double that next year. Read complete article by David Greising.
Tags: FDIC, loan modification, mortgage lending, mortgage loans, mortgage relief
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