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Obama's Opposition to Nationalizing Banks

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By Ben Cohen

In an interesting Q and A with Terry Moran on ABC News, President Obama outlined why he was against nationalizing the crumbling banks. While I believe his answer was honest, the logic and morality of his argument is completely flawed. Here's the transcript:

TERRY MORAN: There are a lot of economists who look
at these banks and they say all that garbage that's in them renders
them essentially insolvent. Why not just nationalize the banks?

OBAMA:Well, you know, it's interesting. There are two countries who
have gone through some big financial crises over the last decade or
two. One was Japan, which never really acknowledged the scale and
magnitude of the problems in their banking system and that resulted in
what's called "The Lost Decade." They kept on trying to paper over the
problems. The markets sort of stayed up because the Japanese government
kept on pumping money in. But, eventually, nothing happened and they
didn't see any growth whatsoever.

Sweden, on the other hand,
had a problem like this. They took over the banks, nationalized them,
got rid of the bad assets, resold the banks and, a couple years later,
they were going again. So you'd think looking at it, Sweden looks like
a good model. Here's the problem; Sweden had like five banks. [LAUGHS]
We've got thousands of banks. You know, the scale of the U.S. economy
and the capital markets are so vast and the problems in terms of
managing and overseeing anything of that scale, I think, would -- our
assessment was that it wouldn't make sense. And we also have different
traditions in this country.

Obviously, Sweden has a different
set of cultures in terms of how the government relates to markets and
America's different. And we want to retain a strong sense of that
private capital fulfilling the core -- core investment needs of this

And so, what we've tried to do is to apply some of
the tough love that's going to be necessary, but do it in a way that's
also recognizing we've got big private capital markets and ultimately
that's going to be the key to getting credit flowing again.

Here's the problem - Obama is still operating under the assumption that people outside of Wall St and Washington believe in the power of private capital to do good. No one believes that private institutions are any more capable than government in this climate, and people's desire to see effective leadership from Washington has never been stronger. There is much evidence to show that nationalization wouldn't be that difficult (while there are many banks, the big ones are responsible for the majority of the problems), and it would be far more democratic than allowing CEO's we've never heard of controlling how our money is spent. While American culture is currently different to the more socialist prone Europe, there is no reason why it can't revert to the Keynesian economics that pulled it out the great depression 80 years ago.

Economists like Paul Krugman and Nouriel Roubini warn of the inevitability of nationalization, and the longer we prolong it, the longer the crisis goes on. I'm sure Obama understands this, and one hopes he is repeating the 'private capital works best' nonsense to avoid more partisan bickering. If not, the economy simply won't recover as people's faith in the banking system is irreversibly damaged.