Talk of "nationalizing the banks" is in the air again this week, as President Obama hits the road to sell his recovery plan and Tim Geithner, the new chairman of the Securities and Exchange Commission gets ready to announce his rescue strategy for the nation's financial institutions. There's plenty to rescue. Bank of America—the country's biggest bank—saw its stock hit a 25-year low, while Citigroup is barely off the bottom it reached last month; even Wells Fargo—once thought the "safest" of the big banks—has lost half its value in the last 60 days. You might wonder, as many are, what's left for the government to "nationalize." But that may be the wrong issue.
Most Americans instinctively dislike the sound of "nationalization"—it summons up images of the Soviets, or the French, of inefficient factories, incompetent managers, bloated bureaucracies, long lines, and surly service. It's un-American, in short.
But pause for a moment: if government will do a worse job running the banks, the rejoinder is "worse than whom"? The bankers themselves? That's a tough argument to make right now. Fannie Mae—the mammoth mortgage lender the government took over last fall after its losses soared, actually operated quite successfully as a government-run agency for decades. Fannie got in trouble only after its charter (and executive pay structure) was jiggered, in a burst of "markets know best" fever, to create what amounted to a private company whose balance sheet was federally guaranteed. At that point, the smart guys running it set out to "maximize shareholder value" and not incidentally their multimillion-dollar compensation; disaster resulted. If anything, returning Fannie Mae (and its companion Freddie Mac) to straightforward government-agency status may be the smartest thing Washington can do when the time comes.
Another argument is that a move toward nationalization right now would drive away private investors willing to step in and take over the banks without further cost to the government. But no one's proposing an industry-wide takeover, and the big banks in the worst trouble are not only "too big to fail," but too big for private investors to buy at any sane price right now. In fact, to judge from the latest economic forecasts, we shouldn't be worrying whether nationalization of America's biggest banks will happen—but what kind of nationalization will occur when it does happen.
The truth is that the United States has a long and overlooked history of "nationalization," starting with the Northwest Ordinance of 1789, and then the Louisiana Purchase of 1803. Both acts put vast amounts of American territory in the public domain, at a time when land was far more valuable than currency. Even today, a third of all the land in the United States is still publicly owned, as are the continental shelves along our coasts, the airspace above us, not to mention hundreds of thousands of miles of roads and trillions of dollars' worth of other public infrastructure so essential to our private economy.
In World War I, the nations' railroads were successfully nationalized to sustain the war effort. In the 1930s, the Reconstruction Finance Corp. bought millions of shares in over 6,000 banks in order to rescue them. During World War II, government took control of the economy's entire pricing system for consumer goods—a more complex job than taking over several big banks—and did quite well at it, most economists agree. In the 1980s, the Resolution Trust Corp. seized hundreds of failed savings and loans in order to save the system. After 9/11, the government effectively nationalized the private-security firms at airports, and replaced them with the federal TSA.
What all these precedents remind us is that, in ducking any discussion of the prospect for "nationalization" of our bankrupt banking giants, we've focused on the wrong issue. It's not whether nationalization should happen, but what sort of nationalization will happen and when.
And that means the real choices for the Obama administration are the same Roosevelt faced with the banks and Reagan and Bush faced with the savings and loans: passive versus active nationalization; regulatory oversight versus direct management; and the shape of regulation after the financial crisis finally eases, including what the regulations will be, who will administer them, and how seriously and well they're enforced.
We need to start having that debate—and soon.