It seems to me that Eric Posner's response to Paul Krugman's excellent column today misses the point. Krugman, as far as I can tell, is not arguing that nationalization can avoid the problem of "overpaying" for assets. Since many of these assets are worth nothing, the only way to avoid "overpayment" would be to simply let the banks go bankrupt, a cure that seems obviously worse than the disease. Once we've decided that we're going to allow banks who should go broke to stay in business, however, the question is not how to avoid "overpayment" but who takes the biggest haircut.
Under nationalization, the government shares the losses, but shareholders get wiped out (crucial for avoiding future moral hazards) and the government also benefits from selling parts of banks that are actually valuable. If the government just takes the bad assets, conversely, it maximizes its losses while people who had bad investments largely get off scot-free. As Matt says, "The TARP alternative is somewhat better for bank managers, much better for equity stakeholders in banks, much better for preserving the myths of American capitalist ideology. Nationalization would be better for ordinary citizens." Unless Posner can defend that particular distribution of the inevitable overpayment (which he makes no effort to do, for what I take to be obvious reasons), his objections to Krugman aren't very persuasive.
--Scott Lemieux
