An Amazingly Disingenuous Piece by Alan Blinder on Bank Nationalization

Before I start shredding “Nationalize? Hey, Not So Fast,” by Alan Blinder in the New York Times, let us first go back to the basic problem,, nomenclature. Blinder does not specifically do so in this article, but opponents to nationalization often raise the image of enterprises being expropriated by the state, in other words, healthy (or at least viable) businesses being stolen.

We have the reverse here. Instead a transfer of wealth from the private sector to the state, we have the state (as in the taxpayer) propping up businesses and keeping management demonstrated to be incompetent, perhaps corrupt (let us not forget that overcompensation in phony good times is tantamount to looting, and liberal accounting appears to be awfully common) in place.

The normal remedy for failed businesses is to let them fail. But we don’t do that with banks. The big fear is depositor runs, and if that were to occur on any scale, it would indeed bring the entire system down.

Quite a few readers have said something along the lines of: “I’m opposed to nationalization, the banks should be put into receivership.” Hate to tell you, they are the same thing.

When a bank fails (technically, the relevant regulators, often state level, deem it to be insolvent, and the FDIC rides in) the FDIC does “own” it. The assets and liabilities are in the hands of the FDIC, it determines how to dispose of them. However, its preference is to seize the bank on a Friday and have the deposits and branches in new hands by Monday. The fact of FDIC ownership is thus not apparent to the public. However, when Continental Illinois failed in 1984, it took nearly a decade for it to be sold (I forget the details, but if my recollection is correct, a reader said it was a real garbage barge).

The other big, BIG, problem is terrible incentives. Management has nothing to lose by taking risks, and to get out from under the governments’ intense oversight and pay caps, its reason to take aggressive risks as great, if not greater, than before. And now there are no shareholders to take the first hit, say by dividend cuts (with stock prices trading at option like levels, anyone who still holds the shares of the big banks is either a punter, not an investor, or very asleep at the switch), and pay and staffing levels already under pressure, the downside of any miscues comes out of the taxpayers’ hide.

John Kay of the Financial Times, hardly a socialist, put it well:

Governments have attempted to impose the first element of nationalisation (ownership) without the second (ultimate control and accountability). But such a separation is neither desirable nor workable for long. The wrangling over Sir Fred Goodwin’s RBS pension is an immediate, if trivial, illustration of problems that arise when the government, in effect, owns an institution but maintains ambiguity about authority. So is the far more substantive issue of who implements lending obligations of publicly supported banks.

Vikram Pandit, Citigroup’s chief executive, poses the issue in stark terms. When the US government announced further support last week, he was reported as telling analysts: “We completely remain in day-to-day charge of the company. We are going to run Citi for shareholders.” But if I were a US taxpayer, I would ask why I had provided $45bn (€36bn, £32bn) to a business that was going to be run for shareholders, especially when the current value of outside equity is barely 10 per cent of my own contribution. I can think of no good answer. The US government has not given Citigroup $45bn because it thinks such support is a good financial investment. Most experience shows the situation of struggling banks gets worse much more often than it improves. The US government has given Citigroup $45bn because it fears, rightly, that its collapse would have devastating consequences for the US financial system.

The first objective of Citigroup’s management should be to put the bank in a state in which it can operate without government support. The second should be to ensure that the organisation is structured in a way that can never again jeopardise the stability of the world economy. The interests of shareholders must be entirely secondary.

So when Mr Pandit says that the government’s injection of capital will not change strategy, operations or governance, I would e-mail my congressman to ask why on earth not, and tell that congressman what changes I did expect. The company should divest or close activities not related to its essential public function. If Citigroup wants to continue to engage in proprietary trading, it should raise capital for the purpose from private sources.

No one wants bank managers to be replaced by civil servants. But there are a lot of perfectly competent bank managers out there, even if there are a lot of incompetent bank executives.

Willem Buiter, true to form, does not mince words:

Like its American and Dutch counterparts, this toxic asset insurance scheme is without redeeming social value: it is inefficient, unfair and expensive to the tax payer. Apart from that it is great. There also are superior alternatives available: full nationalisation and, best of breed, the ‘good bank’ solution.

Now let us contrast these pointed and insightful commentary with Blinder’s piece:

The financial crisis grows weirder by the day. When philosophical conservatives like Alan Greenspan start talking about nationalizing banks, you know you’ve passed into some kind of parallel universe. Why are so many people entertaining an idea that sounds vaguely Marxian?

Yves here. Did you catch that? The article is barely underway and we have an ad hominem attack. “Nationalization” is derided before it is even treated seriously. Back to the piece:

The answer, I think, is simple. We have some pretty sick banks in America right now, some of which may not be viable in the long run. But putting a giant bank through bankruptcy is unthinkable. (Remember Lehman Brothers?) And continuing the water torture that is keeping zombie banks alive is both expensive and dangerous. So why not just bite the proverbial bullet and nationalize them?….

Yves here. This is sloppy at best. Lehman went bankrupt because (drumroll) it was not a bank, it was an investment bank. Of course, Goldman and Morgan Stanley are merely bank holding companies, the intent of that change was to give them access to special Fed facilities for banks, not to allow them to be subject to FDIC receivership (since they aren’t deposiitaries, they wouldn’t be). And there is an interesting paper by John Taylor that argues that the consensus reality, that the Lehman failure led to the Sept-October meltdown, is incorrect (yes, I know you were there, but recall all those studies that show that eyewitness testimony is highly unreliable). Back to the piece:

Because “nationalization” can mean many things, let’s first clarify what the current debate is about. Don’t think Hugo Chávez or even Clement Attlee. Imagine instead that the government acquires a majority interest in — or perhaps 100 percent of — a bank, wipes out the existing shareholders and installs new managers. Then, sometime later, a healthy bank is sold back into private hands, and we all live happily ever after. At least that’s the idea.

Sounds good, you say? And didn’t Sweden pull this off with great success in the early 1990s? Yes, it did, for which the Swedes deserve praise. But this is not Sweden. Let’s think about some of the downsides to nationalizing banks in America.

WHERE TO DRAW THE LINE? First and foremost, the Swedish government had to deal with only a handful of banks; we have more than 8,300. Numbers matter, because deciding where to draw the nationalization line isn’t easy. Presumably, no one wants to nationalize all the banks, thousands of which are healthy. But where do you stop, once you start?

Yves here. This is intellectually dishonest and patently ridiculous. First, has ANYONE, ANYWHERE, suggested taking out 8300 banks, or a significant portion of them?

The 8300 figure badly misrepresents the nature of the problem. The US banking system has become highly concentrated. The top five banks alone account for 45% of the deposits in the US. As mentioned earlier, the US has well established procedures for resolving small bank. Numbers 20 to 8300, maybe even 15 to 8300, is not the problem (yes, if enough hit the wall and we get asset pile-up, the FDIC may have to have son of Resolution Trust Corp. to sell the dodgy assets). The problem is the top banks, and truth be told, Citi and Bank of America.

Blinder also ignores the fact that regulators are obligated under the law to shutter wobbly banks. From former bank regulator William Black:

Whatever happened to the law (Title 12, Sec. 1831o) mandating that banking regulators take “prompt corrective action” to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks.

Back to the article:

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.

Yves again. That is counterfactual. There is so much demand for FDIC insured CDs that rates are super low right now. The world is awash with funds. And the FDIC is sponsoring bank bonds too (recall the Goldman issue, among others). Back to the Times:

THE DOMINO EFFECT As stock traders began to contemplate the nationalization of Banks Five, Six and Seven, their share prices would tank, and short-sellers might consign the companies to an early grave.

Yves here. Ahem, the pending stress tests raise the specter of considerable TARP-y dilution in six months; that’s enough to pressure stocks. And the role of stock prices is way overblown in the solvency/health issue. They have contributed to a down cycle when an institution is under pressure from the rating agencies to increase its equity levels by selling stock to avoid a downgrade. That was the fix that the monolines and Lehman were in. To the article:

THE MANAGEMENT CHALLENGE The Swedes had a relatively simple task. They never had to deal with institutions of the size and complexity of our banking behemoths.

Mr. Geithner has emphasized that governments are ill-suited to manage businesses. I’d take the point a step further: Overseeing the management of dozens, or hundreds, or maybe even thousands of nationalized banks is a daunting task.

Yves here. Again, the thousands specter is a straw man. And the “government running the banks” is also trumped up issue. Uncle Sam is not about to appoint a faceless bureaucrat to the job. Blinder could have raised a more realistic issue: can the government find, screen, and persuade enough banking talent to take over key roles? As in a private sector turnaround, the overwhelming majority of employees stay in place. Typically, the CEO, most or all of the board, and perhaps a few other top management roles are replaced at the outset. They then ascertain if more changes are needed.

The other (bona fide) problematic issue is that the monster banks need to broken up into smaller pieces, if nothing else to make them easier to bring private later and to reduce systemic risk. In fact, it remains unproven if it is even possible to run a huge international bank well. All the incumbents appear to have made a botch of it. That is a very complicated task (but I guarantee McKinsey, Bain, and BCG would fall all over themselves to get the assignment to figure out how accomplish that). Back to Blinder:

POLITICAL OBSTACLES The process of nationalization and reprivatization went amazingly well in Sweden partly because it was remarkably free of political interference. Would that happen here? You decide. My bet is no.

Yves here, You think we don’t have political interference now? TARP recipients are required to participate in the mortgage mod program, for instance, and the Treasury was required to develop procedures to report to the Congressional oversight panel as to how the TARP recipients were using their money (and the only acceptable answer is “to lend”). We are talking at most a difference of degree, and not much of one, I suspect (and is there any evidence that Continental Illinois was subject to unusual pressures when it was in government hands?). Back to the article:

THE CONFIDENCE QUESTION Finally, because nationalization runs counter to deeply ingrained American traditions and attitudes, there is a danger that it might undermine rather than bolster confidence. As I said, this is not Sweden. The Treasury, of course, would never use “nationalization” in public; it would invent some nice euphemism. But the commentariat would not be so constrained.

Yves here. Has Blinder been on vacation in the Amazon? There is plenty of chatter in the MSM that the process underway is nationalization. Some have argued that the banks are effectively owned now (by virtue of the equity injections). The public is already upset, It is hard to see confidence in banks being any worse with nationzalization (indeed, it might improve). Moreover, he ignores a completely different risk. As the payout to banks continues, with the taxpayer having insufficient control and no upside, and unemployment getting worse, there is a risk of social upheaval.

All of that said, there are arguments in favor of nationalization. Or are there?

Yves here. Very cheap rhetorical trick. Back again:
One is that financial firms are careening off track, thereby costing taxpayers more and more bailout money. (Think A.I.G.)

That’s a big concern — and a major reason to seek quick closure.

But remember, the government already owns shares in many banks, and supervisors have immense powers to influence banks without owning them. According to a banking adage, “When your regulator asks you to jump, your only question is ‘How high?’” Because the Fed can pretty much dictate to the banks right now, what additional powers would nationalization bring?

Yves again. Ahem, the government share purchases were at well above market prices. And any shareholder will tell you, ownership does not necessarily equate to control (rampant principal-agent problems). Blinder’s argument is also somewhat contradictory. If regulators have so much power as to push banks around now, then the concern he raised above (re political influence) is already operative, as I suggested.

The plus of nationalization is that the goverment will indeed start acting as if it is in control and start moving the banks towards resolution. Right now, there is a lack of will to “own” the problem, and the banks themselves are the very last to sort themselves out. So the current process guarantees the worst of all possible worlds: meddling on politically hot issues, neglect of the tough decisions that need to be made to clean up the banks. Back to the article:

Another argument is that banks’ dodgy assets are hard to value, making it impossible to know how much capital they need — and probably very expensive to provide it. True again. But nationalization doesn’t make these problems disappear.

Yves here. Utter rubbish. One of the biggest conundrums now is the bad asset problem. Any disposition with the banks as nominally independent parties means the assets need to be valued, and the only price acceptable to the banks is well above market. That means any sale is yet another massive subsidy to the banks with just about zilch odds of taxpayer profit (the public private partnership concept merely enriches a third party, investors, to hide this ugly fact, making the process even more costly). If the government takes over the troubled banks, the valuation problem goes away, It can sell the assets and see what prices they fetch, The initial sales will probably be at terrible prices but more buyers will come forward as trading markets are established and the perceived risk of buying falls. Back to the piece:

If the government takes over a bank, the taxpayers tacitly acquire its assets, thereby inheriting all the uncertainties over valuation. And if a bank has negative net worth when it is nationalized, who do you think fills the hole?

Yves here. Ahem, it’s filling those holes now, yet private shareholders and management can get undeserved upside. And if the powers that be were to do a weekend special and take out all the banks it deemed at risk, at once, it could also renegotiate their bonds (not that the powers that be have the inclination or guts, but Blinder simply brushed past the issue of bondholder cramdowns, which is what OUGHT to be happening. Bonds are risk capital). Back to the article:

So, on closer inspection, the best-sounding arguments for nationalization are really arguments for bullet-biting. Worse yet, even talk about nationalization can be harmful if it puts bank stocks under further selling pressure. After all, who wants to own a stock whose value is heading toward zero? Which is why Mr. Bernanke and Mr. Geithner have taken pains to beat down rumors that nationalization is coming.

Unfortunately, their denials can never be categorical. If worst really does come to worst, the other options may evaporate, leaving the government no choice but to nationalize some banks. (Think Fannie Mae and Freddie Mac.) But, please, let’s not rush there. Let’s first at least explore what is called the “good bank, bad bank” approach.

What’s that? While there are many variants, the basic idea is to break each sick institution into two. The “good bank” gets the good assets, presumably all the deposits and a share of the bank’s remaining capital. As a healthy institution, it can presumably raise fresh capital and go on its merry way as a private company.

The “bad bank” inherits the bad assets and the rest of the capital — which, after appropriate markdowns of the assets, will not be enough. So, again, someone must fill the hole. And, realistically, given the mess we’re in, much of that new capital would likely come from the taxpayers.

Here’s a prediction: We will get to the good-bank, bad-bank solution sooner or later. Wouldn’t it be nice if it was sooner?

Yves again. Dear God, where does he come up with this stuff? How do you make the good bank/bad bank split happen except in a nationalization/takeover scenario? That is the only way it has ever taken place, historically (yes, there were a few private deals in the S&L crisis, but they were Texas banks when a lot of money center banks were still keen to get into Texas on the cheap. The idea of picking up a clean bank at the bottom of the cycle was mighty appealing. And even then, they took quite a while to get done, another fact not commonly advertised, I know because they were peddled to the Japanese, among others). The fact set is not at all germane to a Citi or BofA or any of the big sick banks.

If you read the article again, notice the complete lack of any interest in cost or risk to the taxpayer. The tacit assumption is that the public exists to serve the banks, not vice versa.

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  1. Independent Accountant

    Amen. I have nothing to add to your comments. Personal note: I have encountered Blinder in my “wanderings” and consider him an intellectual charlatan. But he went to Princeton and has a PhD from MIT. So? I am not and never have been impressed with Blinder’s intellect.

  2. Steve

    I suspect that Blinder–a Democrat–has been co-opted into a WH campaign to say we _shouldn’t_ nationalize–when the problem is we _can’t_ nationalize Citi because of off-shore deposits. Blinder knows damn well that a receivership is a nationalization, but he’s agreed to play dumb and talk the WH book. Politically, I think the no-nationalization forces are going to find it harder and harder to assuage public anger. Then at some point they’ll have to tell the public the truth about what would happen if Citi were nationalized. And that will be an ugly day.

  3. Thomas

    The “good bank / bad bank” scenario as he describes it is very simple to implement:

    The shareholders get the “good bank” bit with all related upside. The taxpayer gets to take care of the “bad bank” with all related downside. Easy and quick to implement, because the shareholders would love it.

    You don’t need any external investors: If you hand all the bad assets to the government, you can immediately carve out a well-capitalised good bank able to go on on its own.

    I suppose one could argue that it would restore the right incentives going forward, because the “good bank” would face both upside and downside on its new business.

    But of course it would leave the taxpayer to pay for the mess without even asking for a share of the upside.

    It would be selective nationalization of the bad assets of a bank, while the good assets stay private. Great for the shareholders, horrible for the taxpayer.

  4. fresno dan

    You’ve convinced me, you’ve convinced me!
    I am more or less libertarian philosophically, but always reality based. The big banks aren’t working – probably the whole concept of fractional reserve lending presupposes a very prudent conservative management, but modern compensation schemes in every way undermine taking it slow. The money in the banks is the depositors, and created by the Federal Reserve – there is very little value added by bankers. Its time we get over this aversion to words and proceed with nationalization

  5. Anonymous

    citibank is perfect candidate for slice and dice case.

    I would say make it into 10-20 little banks and assign new crews to lead the little banks.

    I bet the saudi emir wants to own little piece of citibanks Heck, he can buy all the pieces later if he wants (not that he has enough money to do it), Take over citibank, slice and dice it. give fresh capital to these mini citibanks, then sell them.

    I bet a lot of people and organization in the world wants to own class $.5B to .8B banks. The chinese certainly is going to snap 2 of them.

    so. let’s do it. what’s the hold up?

    (not sure about bofa. Is that even a bank? shsss… It’s godzilla coming out of a blender.)

  6. Anonymous

    Why are you doubting the potential talent that the government could hire? Obviously, “private talent” didn’t exactly do their jobs properly.

  7. Dave

    Spot on Yves, in so many ways. I have nothing to add. You have demolished the argument and shown the author for the economic and political charlatan that one can only conclude he must be. Even “Joe the Plumber” types can dissect this argument for the steaming pile of non-sequtur intellectual excrement that it patently is.

    A question I would love to ask Blinder: Are you lying through your teeth, or do you actually believe what you have written. I am truly not sure which answer would be worst.

  8. ruetheday

    “Yves again. Dear God, where does he come up with this stuff? How do you make the good bank/bad bank split happen except in a nationalization/takeover scenario?”

    Exactly my thought when I read the original piece. It shows the intellectual bankruptcy of that side of the argument. What they want is for the toxic waste to be unloaded on the taxpayer and everything else to remain status quo for the banks.

  9. Anonymous

    Alan Blinder is against nationalizing banks because he owns a consulting firm that works for banks. Blinder is the vice chairman of Promontory Interfinancial Network, which provides consulting services to banks. Blinder is also on the board of directors at On Deck Capital which takes wall street money to make small loans to individual.

    Everything Alan Blinder says is bought and paid for by the wall street banks.

    Promontory Financial:

    On Deck Capital:

  10. Anonymous

    “Of course, Goldman and Morgan Stanley are merely bank holding companies, the intent of that change was to give them access to special Fed facilities for banks, not to allow them to be subject to FDIC receivership (since they aren’t deposiitaries, they wouldn’t be).”

    I wonder. They’re under the same type of charter now as depository institutions. Wouldn’t this force the FDIC process? (Albeit strangely ex the usual weekend sale of the branch system, of course.) What would be the alternative in the same circumstances, given their new banking charters?

  11. Thoreau

    Quid pro quo, KPMG, tax shelters, audits of DOJ and unemployment. U-6 unemployment is 15% yet KPMG remains employed by many of its clients including the DOJ. Word on the street is KPMG’s revenues are down at least $300 million which seems low given the number of failed financial institutions KPMG audits whose financial statements were riddled with tax fraud (at least according to Mike Hamersley) and accounting fraud (which apparently only the markets could figure out, right Citi). When are the massive layoffs at KPMG going to start as apparently accounting fraud is out of vogue? Word on the street is KPMG not only audits a disproportionate amount of Insurance companies engaging in accounting fraud and tax fraud but KPMG’s own purported Bermudian fraudulent Captive insurance company, Park, was engaging in accounting and massive tax fraud. How can this be? KPMG as part of its deferred prosecution agreement with the DOJ was given the audit of the DOJ, perhaps, a quid pro quo for KPMG agreeing to throw several of its tax partners under the bus and destroying theirs’ and their families lives, pay a large fine, be monitored by a fellow who used to work for the government as head of the SEC, Breeden (millions in fees earned by a former government official (more quid pro quo)); a deal struck by Flynn, Loonan, Bennett, Taft and Holmes. Which partners will KPMG throw under the bus next to help in avoiding indictment by the DOJ for the massive $100s of Billions in accounting fraud KPMG assisted their financial clients in purveying against the public and the markets. Is it possible the KPMG partners believe that since KPMG audits the DOJ the massive accounting fraud they purveyed will be allowed? Are the DOJ accounting statements riddled with fraud like most of KPMG’s clients? If I were a KPMG partner I would not count on it judging by what the U.S. Government did to Sadam once a good friend of the U.S., is the same type of devastation and destruction coming to KPMG? Word on the street is KPMG through its captive insurance company, Park, not only defrauded its partners (and the KPMG Board of Directors) by kiting current legal claims into insurance liabilities with the help of none other than AIG but committed massive tax fraud itself with the approval of KPMG’s internal legal counsel Loonan and Taft . In fact, the world renowned whistleblower Mike Hamersley testified to the Senate and DOJ, that the type of “tax structuring” KPMG’s captive insurance company entered into (and many of KPMG’s clients) was in fact, tax fraud. And believe me, Hamersley claims he knows tax fraud when he sees it since while at KPMG he purveyed much of this type of tax fraud for his clients, the very same tax fraud he decried to the Senate and DOJ about while destroying the lives of many families, the emails are there for the world to see yet no one looks, why? Does KPMG believe it and its partners are immune from prosecution for continued and massive accounting and tax fraud because of the “deal” it struck to audit the DOJ? If the U.S. government’s behavior in the past towards its presumed friends, KPMG should not count on it and if you are a partner at KPMG that purveyed accounting and tax fraud (at least according to Hamersley), you can only expect to be thrown under the bus for a life of ass raping just like KPMG, Flynn, Loonan, Bennett, Taft and Holmes did to its tax partners (over rather trivial sums compared to the massive financial fraud presently destroying this country). Of course there may be hope since Hamersley a tax fraudster by his own definition has a high level government job destroying lives over the very same type of tax fraud he used to commit not withstanding the fact the government knows he committed tax fraud (based on Hamersley’s own emails), Quid pro quo?

  12. George

    “…opponents to nationalization often raise the image of enterprises being expropriated by the state, in other words, healthy (or at least viable) businesses being stolen.

    We have the reverse here. Instead a transfer of wealth from the private sector to the state, we have the state (as in the taxpayer) propping up businesses and keeping management demonstrated to be incompetent, perhaps corrupt…”

    Absolutely correct! I have never quite heard it put this way but I think that encapsulates the real issue. In fact, it explains why the banks are running with the “nationalization” meme. The evil spetre of “nationalization” is exactly that…healthy profit-making businesses being expropriatd by the government. That is the horror of “socialsm.”

    When businesses fail here in our “capitalist” world they go into bankruptcy. They die. However, the banks, especially the large ones, have created this “exceptionalist” niche for themselves where they simply cannot be left to die. They need bailouts. They have now shielded themselves from the natural results of those bailouts (public oversight) by claiming that this is “nationalization.” In our ideologically-driven political atmosphere everything turns on labels rather than reality, therefore they actually win the debate by turning it into a “nationalization” debate.

    Only here in the blogging world does anyone ever try to get beyond these labels to substance.


  13. Francine McKenna

    Dear Yves, Not sure if Continental Illinois National Bank technically failed in in 1984. They experienced their second major run on the bank that necessitated a bailout and the first “good bank bad bank” example. A timeline of events. I lived it. I joined the bank as a full time employee in Internal Audit in June 1984 after working as an intern in their Employeee Relations Department 1981-1984 developing data in defense of an EEO charge against them in their corp lending training programs. Two famous former employees of that lending organization: Andrew Fastow of Enron and our new Senator, Roland Burris.


    July 5, 1982 Failure of Penn Square Bank, run on Continental

    1982-1984 Rise in non-performing loans

    May 9, 1984 Run begins in Tokyo

    May 11, 1984 Borrows $3.6 billion through Fed discount window

    May 14, 1984 16 banks provide Continental with a $4.5 billion 30-day
    line of credit

    May 17, 1984 Regulators announce unprecedented interim assistance

    September 26, 1984 FDIC implements good/bank bad bank restructuring, effectively nationalizing Continental

    1991 FDIC sells last of equity stake after collapse

  14. Anonymous

    A good friend of mine always said that the biggest whores do not stand on street corners. Blinder is trying to protect the interest of the big bankers. His article is not an intellectual pursuit; it’s shilling for the rich and powerful.

    Don’t over think his and other economist remarks, they are wrong, they know they are wrong, but they are struggling to find a way to stay relevant.

    When we talk about zombie banks, we also need to discuss zombie economist.

  15. Anonymous

    Blinder’s connection to Promontory Financial is repulsive, but not because Promontory is merely a consultant to banks.

    Promontory acts as a parasite on our financial system by using insiders’ knowledge of Fed regulations to structure corporate deposits to maximize deposit insurance. FDIC insurance is intended to insure retail deposits, but Promontory “structures” big corporate deposits so they get covered by FDIC too.

    That a well-known economist and former senior Fed official would associate himself with such an enterprise is sad testimony on the ethical standards of many in Blinder’s generation.

  16. Anonymous

    “Blinder’s connection to Promontory Financial is repulsive, but not because Promontory is merely a consultant to banks. Promontory acts as a parasite on our financial system by using insiders’ knowledge of Fed regulations to structure corporate deposits to maximize deposit insurance.”

    It is worse than just Blinder. Promontory Interfinancial hired many, many ex-government officials to use their connections to game the system.

    Sheryl Kenney
    Arthur Levitt
    Warren Rudman
    Alan Blinder

  17. masaccio

    Citigroup is a bank holding company also. It cannot be nationalized without its consent, which is what is happening.

    The FDIC could take over Citibank if the OCC decided it was insolvent or in danger. This is how bondholders get a haircut.

  18. Jesse

    Excellent *as usual.*

    Thank you, la belle dame sans merci pour ceux qui cacheraient la vérité.

  19. groucho

    “A question I would love to ask Blinder: Are you lying through your teeth, or do you actually believe what you have written. I am truly not sure which answer would be worst.”

    Leopards don’t change their spots…..

    “The last duty of a central banker is to tell the public the truth.”
    Alan Blinder, Vice Chairman of the Federal Reserve
    … stated on PBS’s Nightly Business Report

    Also, remember when Alan Greenspan sent a letter in February 1985 to officials of the Federal Home Loan Bank of San Francisco supporting an application for an exemption for Lincoln to a bank board rule forbidding substantial amounts of some investments?

    “When American Continental Corporation, the parent of Lincoln Savings, went bankrupt in 1989, more than 21,000 mostly elderly investors lost their life savings.”

    What a great country(USA) I(we) live in….particularly when you’re at the top.

  20. S

    One thing that is particularly shocking about those arguing against nationalization, are those that you would least expect. Why is that?

    Blinder is a political hack. and it is the NYT afterall.

  21. Warm, Dry and Well Fed

    More humor. This from Barney Frank’s 3/5 press conference at (

    And no, that’s why –for example, Wachovia, when that went under, it was less traumatic than whe n Merrill Lynch or Goldman went — not Goldman, Merrill Lynch or– or Bear Stearns. Let’s not have a stock run on Goldman. They’re fine. I just misspoke.”

  22. Bob_in_MA

    I think Steve is correct, this was essentially the gist of Obama’s comments. But instead of a being a few general comments on the topic, it tried to turn those general comments into a logical argument.

    I hope Obama reads it, because I doubt if he wouldn’t recognize how poor an argument it makes.

  23. Don

    I’m going to have to be the one person, I suppose, to say that I like Alan Blinder, especially since he backs the Sales Tax Decrease as a stimulus.

    Still, I have to admit, I agree with everything you say.There seems to be a burden of proof in this particular situation such that people who want a few banks seized have to prove that Satan won’t rule the Earth if it happens, whereas the proven, repetitive failure of the current plan is justified on the grounds that Satan hasn’t shown up yet.

    Don the libertarian Democrat

  24. Blurtman


    A bit off topic, but can you provide a few sources of analyses of what a meltdown of AIG would mean, from the perspective of losing this large CDS issuing counterparty? There are a lot of doom and gloom statements made, certainyl there is some credible quantitative analysis out there.


  25. Anonymous

    I make my living as a stock trader.Let me tell you what I do when I hear another well known economist suggest nationalization as a temporary solution.I put on a Texas hedge (Selling short the stock and calls and buying the puts)If I had access to them I would buy credit default swaps on the debt.But here is the main point.I am doing this not on C or Bac.I am doing this on the relatively healthy banks(USB,BK,NT,JPM,WFC,GS,PNC).Needless to say the trades have all been very profitable.The implications of this are numerous.
    1.As all bank and financial stocks spiral lower people think that some event is going to happen to their particular issue.Credit defaults swaps rise to ridiculous levels
    2. many banks slash their dividends partially due to markets perception that something is wrong ,even if there is none
    3.Even thogh the financials represent a much smaller proportion of the market than in previous years,the whole market sells off.
    4. With lower stock and bond prices,the unfunded pension liabilities of companies ,states and municipalities surges.In my state of NJ,estimates have risen above 100 billion dollars.This is going to create a call for huge bailouts from the FEDS

    There are numerous other effects that I have not even imagined yet.
    The defacto nationalization of c is all but a fait accompli.The trick is to avoid all large banks from being desroyed in a vortex of self -fulfliing selling.
    As a taxpayer I am aghast at any government bailouts ,but I also realize the hiden cost of any nationalization are huge.Anybody who thinks that wholesale nationalization of the larget financial institutions will be quick or easy like the S+l in the 1990’s is just plain irrational.

  26. Anonymous

    “Everything Alan Blinder says is bought and paid for by the wall street banks.”

    Wait are you implying people who write for the NYTimes are bought and paid for? No way! /sarcasm

  27. Anonymous


    Thanks again for speaking out truth to power.

    Wouldn’t you rather be making a difference in the daily conversations during this watershed time than suspending connection to write a book?

    We need you in the front lines and your efforts are appreciated. Please figure out some way to monetize your front line efforts over the book deal for now.

  28. Francois

    Nothing to add to the content of this truly excellent post.

    As I read the original piece, and then Yves’s rebuttal (a multi-Kung-Fu strike a la Jet Li) the picture of Baghdad Bob, the famous “Information Minister” during the invasion of Iraq crossed my mind.

    Given the level of hackery, hypocrisy and asshatery Blinder spewed in his “article”, I surprise myself finding Baghdad Bob almost more sympathetic than Alan the Hack.

  29. PCLE

    This would be the same Blinder who tried to disrespect Buiter at Jackson Hole last summer when Buiter launched into the incompetence of the Federal Reserve.

  30. MethodMan

    Read between the lines.

    This is the final stage of the game.

    People will be paid, favors will be called in, arms will be twisted. And more. Billions in potential personal wealth are at stake. It will not be given up without a fight.

  31. sailorwill

    In my response to a Krugman blog entry, I tried to provide some intellectual underpinning for taxpayers helping out banks:

    I see Dr. Krugman admits his main argument for bank nationalization is political and ideological — giving the government/taxpayers all the future upside by wiping out shareholders. The government may well have to guarantee all bank liabilities either way to maintain financial system stability. The good bank/bad bank solution could give all the upside to shareholders, nationalization solution will give all the upside to the government/taxpayers. If we do have to write down liabilities, it is not imperative that be done via nationalized banks. As a matter of fact, with nationalized banks, you might as well hang a sign out, “U.S. is not honoring its debt”. I wonder how our creditors will like it. Without government taking on the liabilities, or writing them down, which Dr. Krugman admitted is deeply technical (i.e., could drag on), re-privatize the banks quickly is simply not practical. Do Dr. Krugman acknowledge now government ownership will drag on for years? Do we want all our banks run by the government for years? I wouldn’t. If we re-privatize the banks quickly while holding on to all the liabilities, wouldn’t we be just benefiting one set of capital while penalizing another, while risking all the uncertainty of the nationalization process? It seems to me, the answer should be participating but sharing all upside/downside with private sector without going through the risk and uncertainty of this process.

    In an earlier response to “What’s the matter with Kansas”, I tried to point out that our government, elected by its taxpayers, was a primary culprit in creating this national crisis. Therefore, the taxpayers, as citizens of our nation, who lived large individually and through our government, bear responsibility for this crisis. It is only fitting for the taxpayers to own up and help pay for solving the problem. As we are a capitalist system, much of the payment should go to help the private sector without seizing them. I am in favor of the Obama Administration’s progressive agenda in tax and health care to redress the imbalance of earlier unbridled capitalism. I also strongly believe in strengthening regulation going forward. However, we must not go too far and quench the capitalistic risk-taking spirit that helped to shape our nation. In my opinion, nationalizing banks for the sake of giving all the upside to taxpayers will do exactly that, and is near-sighted.

  32. Anonymous

    “As we are a capitalist system, much of the payment should go to help the private sector without seizing them.”

    If you were really a capitalist, you would advocate putting the banks into bankruptcy. If the banks can’t survive on their without government capital, they are insolvent and should be seized. Giving the banks money on any other terms is corrupt cronyism that helps Alan Blinders’ clients, the big wall street banks who he helps evade bank regulations.

  33. DanyBoy

    Yves, thanks once again for enlightening and cogent discussion.
    We need people like you who can see through the fog, so the shi[ can at least move forward.

    I detect in your comments and those of others a hint of exasperation, a soupcon of hostility not only toward Mr Blinder but at those to whom we have traditionally looked to for guidance. I relate.

    Perhaps we should call this stage The Fronde since we are all ready to throw rocks at the representatives of the “Ancien Regime”.

    In many ways what we are witnessing is similar to the decline of the aristocracy that occurred during the latter 18th century and in some cases lasted until the early 20th. It is a process of gradual “de-deification” of the Masters of the UNiverse who, like aristocrats, once had devine powers and were gradually forced to de-deify by dint of needing money from the populace and the growing middle class. It came in stages including the Enlightenment, the Age of Reason, and various guises that were all tantamount to negotiated peace and reduction of power.

    Well our former, well entrenched aristocracy here in America is kiking mad and not giving up too easy. They have the reigns of power in Washington (that’s clear). And like Louis XVI on the eve of revolution, they want to raise taxes to finance the style of working and living to which they have become accustomed. they are puzzled at the resistance.

    Unlike the fall of the European aristocracy, there are far fewer supporting institutions like the church.

    The Administration will start a prairie fire any day now. Americans are conservative but we do revolt over 1 issue like no other: Taxes!!

    The dawning realization about the magnitude of the mess that banksters adn the like have left us with, coupled with the Administration’s pandering to Wall Street interests will ignite the prairie fire.
    Obama has already had his “Let them eat cake” moment this weekend : ATTENTION YVES

    “Obama Disses Economics Blogs”

  34. Steve

    “we must not go too far and quench the capitalistic risk-taking spirit that helped to shape our nation”

    And may well destroy it from the looks of things.

  35. Charles Monneron

    Right on, Yves. Well Done !
    When economic editors of the New York Times fall down to let pass such kind of paper, this confirms my opinion that only select blogs are worth reading. Short the MSM !

  36. Anonymous

    At the risk of being obvious, I think this piece (aside from being right) demonstrates that truth cannot be ascertained from the strength of just one single argument. It takes two, in this case a very weak one, to demonstrate the veracity of the other, stronger one. Too bad Blinder wouldn’t/couldn’t do the same and make his case in some sort of more even-handed way

  37. Anonymous

    Blinder is a Princeton tenured welfare queen–who expected him to put any effort into his analysis? He’s also a Democratic shill, like Sean Wilentz, another Princeton welfare queen and Bill Clinton attacker dog.

    A thorough embarassment to all their colleagues, who–if they have any sense–will start challenging their idiocies.

    As for Obama, we shouldn’t over look the liklihood that he is seeking to get rich off the Presidency like Bill Clinton (equal rights, you know), and will never act with integrity on this particular matter, along with many others of particular importance right now.

    And, with Princeton welfare queens shilling for you, I guess you don’t have to.

    Needless to say, this cozy relationship needs to end.

    Oh, look: the captcha says “looter.”

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