One of the things I find truly remarkable is the degree to which Americans (or at least commentary in pretty much all American media) have bought into certain ideological constructs as if they were gospel truth.
Now in fact, most of us operate from ideologies of various sorts. For instance, reasonable people can differ on the tradeoff between individual liberty versus greater social good, on efficiency versus fairness. But casting them as some sort of objective truth dulls thinking and impedes coming up with solutions.
It is also important to recognize how far the country has moved to the right in the last generation plus (when I was a kid, I considered myself to be pretty indifferent to politics, and middle of the road on most issues save civil liberties, where I was left leaning. My views have not changed, but the rest of the country has). Joe Klein (via Brad DeLong) is more pointed:
We are at the end of a 30-year period of radical conservatism, a period so right-wing that many of those now considered “liberals”–like, say, Barack Obama–would be seen as moderate pantywaists in the great sweep of modern political history. The past 30 years have… [seen] such a profound destruction of the basic functions of government that a major rectification is called for now–in rebalancing the system of taxation toward progressivity, in rebuilding the infrastructure of the country, not just physically, but also socially and intellectually.
Again, reasonable people can differ on how much of a reversal is needed, but the sorry record of the Bush push even further right (and his big business corpocracy is a form of conservatism, even if it betrayed small government Republicans) means a retreat is in the cards.
Back to the beat of this blog. One of the canards that has become instilled over the last 20 plus years is “government is every and always awful, the private sector is every and always better.” There are some compelling illustrations of the former (the postal service versus Federal Express. But gee, we made the Post Office private, sort of, to fix that problem. As far as I can tell, it hasn’t made things better). There are also examples of competence, indeed high skill levels, in government. Would you want air traffic control in the hands of the private sector? I’m belatedly reading Nassim Nicolas Taleb’s The Black Swan, and he goes to great lengths to describe how defense analysts have a far greater appreciation of risk and the “unknown unknowns” that can create true disasters, than their vastly better paid counterparts in finance.
Recall that the “if you are in government, you must be no good” myth is based on the idea that government pay scales are no good, and everyone in America is motivated solely by money. The latter is clearly not true, and the inefficiency of the education and labor markets in the US mean that plenty of good people (in terms of native intelligence, work habits, and personality) may nevertheless not wind up on the social/educational tracks that could land them in big ticket jobs (of course, now that the economy is tanking, those less lucrative but more stable government tracks don’t look as shabby as they once did). I have run into way way too many people who had every bit as much to offer as the Ivy League types but for reasons of family background (where they went to high school, most often, since you need to go to a strong secondary school to have a shot at a top drawer private college) were unlikely to be accepted. And I have met plenty of people who went to fancy schools who are idiots.
In addition, I have had the pleasure of dealing with the occasional well run government department. New York City has a great housing office (phones answered quickly, information detailed, with reference to the statues and procedures, courteous manner) as well as the New York State Insurance Department (prompt action on correspondence, even agents making multiple calls to find answers and getting back to me in less than 24 hours. I seldom get that in the private sector). Admittedly, this is anecdotal, but the prejudice of the reverse sort is not based on much more. And that’s before we get into the considerable graft and waste involved in outsourcing.
This long-winded preamble relates to the matter at hand, namely, the bizarre reluctance to have the government exercise more authority over banks it effectively owns. The Fed and Treasury seem a bit schizophrenic: they really do not want to take on this mission, yet are coming to recognize, with so much at stake, they can’t leave the banks on auto pilot. But the ambivalence shows, and may be exacerbated by the mantra in the media, “We don’t want the government running the banks.” Given how badly the banksters have done, second best choices may not be so bad right now.
The Financial Times has two comments today, one by John Kay, the other by Martin Wolf, and both dispatch this topic well. First from Kay:
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.
And from Wolf:
Much of the debate [over nationalization] is semantic. But underneath it are at least two big issues. Who bears losses? How does one best restructure banks?…
Yet the overwhelming bulk of banking assets are financed through borrowing, not equity. Thus the decision to keep creditors whole has huge implications. If we accept Mr Bernanke’s definition of “nationalisation” as a decision to “wipe out private shareholders”, we can call this activity “socialisation”.
What are its pros and cons?
The biggest cons are two. First, loss-socialisation lowers the funding costs of mega-banks, thereby selectively subsidising their balance sheets. This, in turn, exacerbates the “too big to fail” problem. Second, it leaves shareholders with an option on the upside and, at current market values, next to no risk on the downside. That will motivate “going for broke”. So loss-socialisation increases the need to control management. The four biggest US commercial banks – JPMorgan Chase, Citigroup, Bank of America and Wells Fargo – possess 64 per cent of the assets of US commercial banks (see chart). If creditors of these businesses cannot suffer significant losses, this is not much of a market economy….
In those circumstances, the idea of “nationalisation” should be seen as a synonym for “restructuring”. Few believe banks would be best managed by the government indefinitely (though recent performance gives some pause). The advantage of nationalisation, then, is that it would allow restructuring of assets and liabilities into “good” and “bad” banks. The big disadvantages are inherent in organising the takeover and then the restructuring of such complex institutions.
If it is impossible to impose losses on creditors, the state could well own huge banks for a long time before it is able to return them to the market. The largest bank restructuring undertaken by the US, before last year, was that of Continental Illinois, seized in 1984. It was then the seventh largest bank and yet it took a decade. How long might the restructuring and sale of Citigroup take, with its huge global entanglements? What damage to its franchise and operations might be done in the process?
We are painfully learning that the world’s mega-banks are too complex to manage, too big to fail and too hard to restructure. Nobody would wish to start from here. But, as worries in the stock market show, banks must be fixed, in an orderly and systematic way. The stress tests should be tougher than now planned. Recapitalisation must then occur. Call it a banana if you want. But bank restructuring itself must begin.
Both pieces are worth reading in their entirety.