Sunday, March 8, 2009

Alan Blinder on Nationalization; Ben Stein in Fantasy Land

Today's New York Times has an interesting article opposing nationalization of US banks. I recommend it. Princeton University Professor Blinder, it is worth noting, is an Obama supporter and cannot be accused of genuflecting to the "laissez-faire or bust" philosophy.

Why is Blinder against "nationalizing" the banks? Remember that Alan Greenspan and other worthies have suggested that nationalization might be a good idea. Blinder's main argument is that if you nationalize banks 1, 2, 3, 4, then you create problems for banks 5, 6, 7, and 8, who were not nationalized. Why? Because a nationalized bank gets to borrow at much lower rates than a bank that is not nationalized. After all, one has the full faith and credit of the US government behind it and the other does not. So, what happens is that nationalizing banks 1, 2, 3, 4 creates a crisis for banks 5, 6, 7, and 8, who are unable to compete with nationalized banks and are forced to pay higher rates just to survive. Eventually, banks 5, 6, 7, and 8 will need the same government relief that has overtaken banks 1, 2, 3, 4.

What Blinder blissfully ignores is that this problem is exactly what we have now. By putting a ton of money into Citi, you create a problem for BAC. By putting a ton of money into BAC, you create a problem for JPMorgan and Wells Fargo. By putting a ton of money into AIG, you create a problem for GE. And on and on and on. Once the government is assumed to be backing a company deemed "too big to fail," it makes the competitors of that company the next candidate for "too big to fail." This is a process without end (except when the country doing it, itself, falls into bankruptcy...not a pleasant thought).

Blinder is on the right track. He doesn't draw the obvious conclusion: Stop subsidizing and bailing out these institutions! Otherwise, there is no end to this process.

I hope someone listens to Professor Blinder and thinks this one through.

As for Ben Stein's article in the New York Times. He argues that the US should limit short selling, by bringing back the uptick rule, clamp down on the CDS market and obliterate the mark-to-market rules. While mark-to-market rules probably need to be revisited, especially the requirement that performing assets need to be written down, the idea that the market decline is to be attributed to the rampant misbehavior of speculators (and accountants) is absurd.

Broadly speaking, the stock market over the last six months has two messages: 1) financial institutions and their customers took far too much risk and now must pay the piper; and 2) the Obama Administration's economic proposals could put could the US economy into the deep freeze for generations to come. No amount of tinkering with trading rules and accounting procedures can alter these concerns of stock markets world wide.