Is ‘nationalization’ of banks a better option than bailing them out to the tune of a trillion dollars?

The ideal remedial action from the government would have been to press forward with nationalization of banks.  But unfortunately, the political pressures faced by President Obama and the stimulus announcements made in Europe had ended those hopes.  President Obama was careful not to alienate the conservative sections of the House of Representatives by acting against their principle of “a small government”.  The nationalization option would also have safeguarded taxpayer money by converting them into government-held equity stakes in banks.  Furthermore, the collapse of Lehman Brothers was not an one-off event; several other major banks such as Meryl Lynch and Citibank were also on the verge of bankruptcy.  This should have convinced the policy makers about the systemic failure of the financial system in America – something which piecemeal solutions like financial bailouts will fail to address.  By partially nationalizing the banks, on the other hand, the government could enforce greater regulation within the financial system, thereby preventing recessions in the future.  Hence, there is a strong case for partially nationalizing the major banks in America.  Such a measure would be unprecedented in American history, were it to happen.  But the political and corporate opposition to the measure is so vocal that President Obama had to settle for the next best plan, namely, infusion of taxpayer money to support privately owned banks.

In fact, the most convincing case for the nationalization of banks is forwarded by two eminent economists.  Joseph Stiglitz and Paul Krugman, both Nobel Prize winners in the field of economics have unequivocally expressed their support for the nationalization option.  But their voice of reason and prudence was drowned out by the more influential corporate media commentators and lobbyists.  As a consequence, the American public is done injustice by the Bush and Obama Administration by acting against their electoral and constitutional mandate.  As Matthew Rothschild states in his article for The Progressive magazine, “As it is right now, we’re getting some of the vices of nationalization without all the virtues. We’re shelling out gobs of public money for these companies—in many cases, more money than the companies are actually worth—but we’re not running these companies in the public interest. We’re allowing the companies to remain in private hands, for private purposes.” (Rothschild, 2009) This sentiment echoes that of Stiglitz and Krugman in that “throwing hundreds of billions of dollars, over and over, to keep these banks on life support makes no sense” (Rothschild, 2009).  The problem is compounded by the prejudices held by a majority of Congressmen and Senators against the notion of ‘nationalization’.  The very term, according to most of them, betrays the key founding principle upon which the American nation is built, namely that of unfettered capitalism.

References:

James L. Roark, American Promise – A Compact History (Chapters 23 & 24) Third Edition

Paul A. Gusmorino, “Main Causes of the Great Depression”, retrieved from <http://www.gusmorino.com/pag3/greatdepression/index.html> on 9th October, 2009

Senator Bernie Sanders, “Tax the Rich to Pay for the Bailout”, retrieved from <http://www.monthlyreview.org/mrzine/sanders041008.html> on 9th October, 2009

Matthew Rothschild, “Nationalize the Banks”, retrieved from <http://www.progressive.org/mag/wx021109.html > on  9th October, 2009