Obama’s Opposition to Nationalizing Banks

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?

PRESIDENT

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

country.

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.

Ben Cohen is the editor and founder of The Daily Banter. He lives in Washington DC where he does podcasts, teaches Martial Arts, and tries to be a good father. He would be extremely disturbed if you took him too seriously.