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"I believe in biting the bullet, but it matters which bullet you bite," writes Alan Blinder in The New York Times. As it happens, I'm pretty sure that's not true. Given a couple of bullets to bite on while someone is performing non-anesthetized surgery on you, being really picky about which cartridge to chew probably won't change the outcome much.Metaphors aside, that sentence comes from Alan Blinder's op-ed arguing against nationalization. He argues that nationalization would beget nationalization. And though the fear among many liberals is that buying toxic assets will prove needlessly expensive, so too would a chain reaction in which the ripple effects of nationalization brings down the banking system. Indeed, this is a point I'd like to hear some pro-nationalization experts rebut:
Suppose we nationalized four banks. Bank Five would then find itself at a severe disadvantage in competing for funds with the government-backed quartet. Forced to pay higher interest rates to attract depositors and other creditors, its profitability would suffer. Soon, Bank Five might start looking like a candidate for nationalization, too — followed by Banks Six, Seven and so on.Your move, Mr. Krugman.Update: Yves Smith responds. She is, to say the least, unimpressed. "There is so much demand for FDIC insured CDs that rates are super low right now," she says. "The world is awash with funds." But that addresses the issue too narrowly. I'd rephrase Blinder's objection: If four big banks went down -- behemoth banks, banks that formerly seemed immovable features of the business landscape -- and got put into federal receivership, why would anyone bring new money into the non-government held banks? Wouldn't you be more certain that the major banks under effective federal protection would survive then that one of the banks whose finances may or may not endure the next three years would survive? That's not necessarily a reason to avoid nationalizing. It may be the only way that the banking system survives. But it does seem a potential pitfall.Update the Second: Paul Krugman also responds.
