Via Tim Fernholz comes a good point from Greg Mankiw:
If the government is to intervene in a big way to fix the banking system, "nationalization" is the wrong word because it suggests the wrong endgame. If banks are as insolvent as some analysts claim, then the goal should be a massive reorganization of these financial institutions. Some might call it nationalization, but more accurately it would be a type of bankruptcy procedure.Bankruptcy could become, in effect, a massive bank recapitalization. Essentially, the equity holders are told, "Go away, you have been zeroed out." The debt holders are told, "Congratulations, you are the new equity holders." Suddenly, these financial organizations have a lot more equity capital and not a shred of debt! And all done without a penny of taxpayer money!
That's in essence right. No one actually wants the government running Bank of America. But it could be that insolvency means Bank of America ceases to be able to run Bank of America, but we decide that we can't let Bank of America fold. The process that that suggests is closer to what businesses do when they lose all their money than what Marxists do when they take power in a coup. It's a supercharged bankruptcy proceeding.Tim Fernholz comments that "one reminder from the economic stimulus legislation is the need to clearly frame this debate." That's true, and oddly, I think it's been well-framed: The administration has done a good job cementing the impression that they won't nationalize. But there seem to be provisions in the Geithner plan that look a whole lot like an option to nationalize, and Obama is now saying he's willing to nationalize but using the word "Sweden" instead of the word "nationalize."
