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Not the plan, actually, just the word. It does seem that the consensus among many economists (and Lindsey Graham!) is that the government will have to go through a nationalization process with some of the major insolvent banks sooner or later, and the sooner the better. But the administration has come under fire for its cultural fear of saying "nationalization," with all of the negative connotations that word can summon up. How can they keep pushing on the policy? Surprisingly enough, Greg Mankiw makes a good point: "If it is done right, nationalization will be the wrong word to describe the process."
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!Mankiw goes on to observe that it's not all that easy, but the track he's on is the right one: no one thinks that the government should be running the bank industry. It's a temporary solution. While I'm not sure if "pre-privatization" is quite the right term, one reminder from the economic stimulus legislation is the need to clearly frame this debate. Any ambitious plan to attack the problems of the financial industry is sure to run into obstructionist pressure on the right, so the administraiton needs to clearly articulate its goals. Of course, this hearkens back to the early days of the "bailout" versus "rescue" debate (or "stimulus" versus "jobs and recovery.") It does seem clear that the administration has been doing its best to absorb the lessons of their first trip through the legislature -- and ringing critiques of Tim Geithner's original proposal -- so hopefully we can expect a stronger case for the next leg of the three part anti-recession plan.
-- Tim Fernholz
