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.