In the Great Nationalization Debate, it's important, as Felix Salmon argues today, to keep in mind the alternatives to nationalization. For instance: It is a big step to nationalize the banks. But is it a bigger or smaller step than nationalizing the bank's losses? I'm not sure the answer to that is clear. The logic of nationalization is, at the least, straightforward. As Stephen Waldman puts it, "The reason to nationalize a bank is because the bank has failed and its former owners have no legitimate claim to its assets. The government has been forced to offer support with public money, thereby purchasing the corpse fair and square. We take the bank into public ownership because taxpayers who have been conscripted to accept extraordinary losses are entitled to whatever gains follow the reorganization they finance." And that means the incentives, too, are straightforward: If you don't want to lose your bank, don't take on such risk that it fails. The logic of nationalizing losses is rather less clear. The reason you nationalize losses and bad assets is that the bank is "too big to fail" but not so big that it can survive without government help. The incentives of this are less clear. if the government won't permit you to fail, there's less reason to fear risk. And why should taxpayers be buying the bank's losses rather than the bank? Why should the government believe it can price assets better than the market can? To put this slightly differently, the question does not seem to be whether we nationalize, but what we nationalize, and what the implications are. And it may well be that the implications of nationalizing a full bank are less radical than the implications of nationalizing a bank's losses. But so long as we're going to have banks that are "too big to fail" -- and absent a whole different set of interventions, we will -- the nationalization debate is settled: These banks are, on some level, already nationalized. The question really becomes whether we nationalize them to the benefit of taxpayers or shareholders.
