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Framing nationalization

February 20th, 2009

With even Alan Greenspan Smother move and Lindsey Graham now in support, and the alternatives canvassed in the Geithner “plan” thoroughly discredited (even Wall Street hated it), large-scale nationalization of US banks now looks inevitable. But, as Obama has observed, this kind of thing seems alien to US culture.

This looks like a classic Lakoff framing problem. How can the obviously necessary, also be made to seem natural? There have been a couple of approaches so far.

The first is to emphasise that the Federal Deposit Insurance Corporation routinely takes over failed banks. So, as Paul Krugman puts it “nationalization is as American as apple pie“.

The second is to focus on the ultimate goal which is to return the banks to solvency and private ownership. Hence the lovely euphemism coined (I think) by Calculated Risk “preprivatisation

While we are on the topic, the sudden emergence of “socialism” as a term of political debate in the US, raises the question of whether “social democrat” might come in to use as an alternative to the rather unsatisfactory “liberal” and “progressive” terms currently in use. Maybe it’s too European for the US, but it’s certainly come into much more common use in Australia over the last decade or so.

And still on the same general topic, I meant to write about Sheri Berman’s piece in Dissent but Henry at Crooked Timber beat me to it. My take on the situation is a bit more optimistic. It’s pretty clear that the collapse of so much of the established order has taken social democrats unawares, even if the shock is not as great as for others. After decades in which the primary focus was to defend and adapt as much as possible of the social-democratic settlement in a world dominated by global finance, everyone is struggling to deal with the immediate emergency, and there has been little time to think about the opportunities for more positive action that have opened up. But the full-scale crisis is only a few months old, and the responses look a lot more constructive than in the wake of the 1929 crash.

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  1. Ernestine Gross
    February 22nd, 2009 at 15:31 | #1

    Terje, I’ll start from your second response.

    True, your house is valued in terms of the national currency unit (A$). However, the value of your house (ie how many currency units) depends not only on the number of fiat currency units generated by the government but also on the amounts of private debt, denominated in fiat currency units, generated by the private banking system. All other monetary prices are affected too but not necessarily equally (eg asset price inflation vs CPI).

    Bankruptcy laws seem to work quite well for producers of non-essential physical commodities and some non-essential services, particularly when there is no bunching of business failures. These laws may be adequate when there is the ocasional isolated bank failure (‘assets’ – physical things and the loan portfolio are sold to another bank.) But this is not the situation we are in. There was (hopefully past tense) an accute risk of total system collapse – ie all banks fail more or less at the same time and as a consequence many non-bank enterprises fail and individuals with debt are bankrupt, etc, etc. The effect on prices (‘values’) is something one doesn’t want to experience. The only solution to such a monumental mess, known to me, is to go back to barter.

    To the best of my knowledge, there isn’t an approprate and generally accepted terminology – so I use words like ‘franchise’.

  2. TerjeP
    February 22nd, 2009 at 15:40 | #2

    Ernestine – businesses can go bankrupt and still continue to operate. Banks going bankrupt does not mean that they cease to operate. It just means that they essentially become the property of creditors rather than the property of existing share holders. This is what should happen to insolvent banks. In the context of traditional banks it would mean that the depositors take over the management of the bank. It seems fair to me. It also seems very pragmatic.

  3. TerjeP
    February 22nd, 2009 at 15:43 | #3

    However, the value of your house (ie how many currency units) depends not only on the number of fiat currency units generated by the government but also on the amounts of private debt, denominated in fiat currency units, generated by the private banking system.

    The flip side is that the amount of debt is probably somewhat related to the value of our homes. I’m still concerned by your readiness to declare things ripe for nationalisation merely on the basis of the unit of account in which they are valued. If we value our wheat harvest in US dollars does that give the US government a claim over our wheat harvest? If our government borrows in US dollars (or lends in US dollars) does that make our government the defacto property of the US government? It seems to me that you are being needlessly reckless with concepts of property.

  4. Ernestine Gross
    February 22nd, 2009 at 15:51 | #4

    Alana @50, You now mis-quote your own answer @17.

    You made a sweeping generalisation about economists @9, assigned to them jobs which and you want to hold them responsible for the jobs you created retrospectively and without checking empirical realities. When I asked you to substantiate your accusation regarding economists, you replied with quotes from 2 economists in defence. I call this a contradiction.

    Could we please leave it at that.

  5. Alanna
    February 22nd, 2009 at 17:17 | #5

    You can leave your posts at whatever point you want Ernestine.

    I just gave you some empirical realities which you ignored and I will leave my responses to your unexplained questions there as well.

  6. observa
    February 22nd, 2009 at 17:35 | #6

    Alanna et al, re blaming the rise of the free marketeers and deregulation for the problems, that is still a topic of much dispute, which obviously has ramifications for such measures as bank nationilisation, etc

    Basically Phil Gramm argues “that a strong case can be made that the financial crisis stemmed from a confluence of two factors. The first was the unintended consequences of a monetary policy, developed to combat inventory cycle recessions in the last half of the 20th century, that was not well suited to the speculative bubble recession of 2001. The second was the politicization of mortgage lending.”

    http://online.wsj.com/article/SB123509667125829243.html
    Now that certainly has ramifications for who we were going to sack if we still had Workchoices. Personally I think Gramm misses the additional confluence of Western demographics and Asian savings gluts producing that ‘Great Moderation’, a particular alignment of massive planets, the effect of which simply served to pull all brains toward the notion that a new form of anti-gravity machine had been invented. When the new sun never set on rising asset prices these worshippers couldn’t get enough of free markets(Reaganite Thatcherites all), but there’s nothing like an eclipse of their sun to make them all Keynesians now. Austrians had seen and heard it all before, although not in this particular form. Each eclipse is different in location and intensity but the fundamental laws of monetary gravity never change.

    As for more financial regulation and regulators, go tell that to Harry Markopoulos for a belly laugh. He knows only too well that regulators are really professional mourners paid to empathise with fools, often to be found in the company of bailout barons that would fill the world with even more fools. Such is life!

  7. Alanna
    February 22nd, 2009 at 17:53 | #7

    54# Ernestine.
    I did not misquote myself at 17. That was your own interpretation. If you have doubts that economists may be held responsible for poor advice, look to the free trade agreement that permits private organisations to sue governments. A reckless decision on the part of the Howard Government to sign that. How do you think I feel as a taxpayer at the thought some powerful deep pocketed organisation can potentially sue for my taxes. An utterly stupid decision in the extreme.

  8. stuart
    February 22nd, 2009 at 18:10 | #8

    private organisations can already sue governments in most countries in the world. I dont see how this is at all different.

  9. Ernestine Gross
    February 22nd, 2009 at 18:58 | #9

    PML @ 48,

    I don’t accept your first criticism on the grounds that I used the term ‘national currency units’ in a paragraph where I talked about private banks generating debt (means of payment) denominated in national currency units (unit of account)..

    As for your second criticism, I am happy to do away with the word “allow” (and your word (compel) by writing : The current institutional environment in many countries is such that private organisations, called banks, can generate debt, denominated in the national unit of account. In the countries in question, the institutional environment is created by the legislative power of elected national governments, often after consultation with other such governments.

  10. Alanna
    February 22nd, 2009 at 19:11 | #10

    Stuart#58

    Then I welcome the private class actions of individuals over loss of jobs, loss of security and loss of tenure? – is that in the FTA agreement?.

    Ernestine wanted more empirical evidence of loss of jobs. Im not going to trawl in the ABS – Ive already done it. He can do it himself. While he is there he can look at the rise in family breakdowns, the rise in the number of years it takes to pay off the family home, the rise in household debt.

    I would suggest The ABS even started the series on underemployment because they were concerned about the misleading figure that is unemployment (they are good people – they do the numbers).

    There is more than enough empirical evidence out there that Australia has not been travelling as well in the past thirty years as in the thirty years before that. Trends are not good. Time to examine policy. Is that such a big ask? Genuine and honest economists would do it (and do do it).

    I have a child of seventeen. Do you think I want him to walk into a Labour force where unemployment is the norm, casualisation is the norm, exploitation of the young is the norm (yes my uni students tell me), lower salaries are the norm except for the priivlieged inner circle? How many years work to pay off a house now compared to thirty years ago? How many incomes does it take? Mum and Dad both working?. Sure some will say we are better off – appliances are cheaper, but they are imports.

    Im not an idiot. Ive got a child and Id like to see the country run by people who dont live under the dream of the perfect model, but by pragmatists – be they economists or politicians who are prepared to do the hard yards to examine the reality of where Australia is right now, where it is travelling (for the majority of people), how it compares to post war years, (and what can we do about it?) not under some dream of a bright rosy future that benefits only the wealthiest organisations or individuals.

    Im disgusted with the economic policy over the past two decades. I grew up when some government services were taken for granted. When governments knew their role and no politicians questioned it. The trains and buses could be expected. The holes in roads were assumed to be taken catre of. Ive watched a lot of good systems disintegrate in my life time. Im not that young and I remember. Im disgusted with those who ignore every trend under the sun, right under their noses, including economists and politicians. But worse than that, I am angry about it and angry on behalf of the world my son will work in.

  11. observa
    February 22nd, 2009 at 19:31 | #11

    Actually one shouldn’t berate fools for being fools without telling them how to behave and so to those fools at the top who think they’re actually running things.

    Cast your mind back 12 months ago to all those utterings from on high, as they were raising interest rates to ward off inflationary expectations(don’t laugh). As the penny began to drop that we weren’t exactly decoupled from a globalised world, but anyway China would be our saviour, our banks were safe(despite all that preceding neoliberalism), yada, yada, our fearless Treasurer farts in public that he’d better introduce legislation to guarantee $20k of everyone’s deposits. (what’s that smell if not the sweet scent of rose coloured glasses ask the partygoers?) Not to be outdone, the shy retiring merchant banker in the corner farts even louder it should be $100k and then the life of the party clears the room, and every other financial intermediary for blocks, with a peasouper blanket guarantee. As if that wouldn’t cover every bad smelling sewerage loan and cesspit investment in the land I ask you?

    So what’s to be done now with a shocking hangover, among the empties and the portaloos overflowing? It’s about time we dumped all the experts and called in Kenny for some practical commonsense. Scrap the blanket guarantee for a 60% limit for all depositors on the clear understanding if any bank runs into trouble it will be immediately closed, the shareholders’ equity forfeited and every depositor’s account reduced by 40% and that turned into new prorata equity in the bank, along with any new buyout equity. The Govt guarantees the other 60% of deposits.

    There are obvious spinoffs here. Apart from the odd depositor walking for the mattress, depositors right across the spectrum would look hard at any alternative returns, as well as maintaining interest in an individual bank’s solvency. In the event of a run and a 40% loss amortised, the moment the bank is recapitalised and open again, the depositors have an interest in leaving their remaining savings there and carrying on as usual. Overall there is no incentive to spread savings among banks like Swan and Turnbull were promoting with fixed gurantees. It has to be a reasonable, limited percentage that protects the taxpayer and at the same time puts shareholders equity at risk first. They then have a stake in the solvency of the bank even to the point of forgoing dividends. Then the Govt needs to send a loud and clear message-’No more bailouts’ It’s Centrelink for eveyone and that’s final. In the meantime for a two year period (the length of that stupid blanket deposit guarantee)ALL existing wages, hours and conditions are as negotiable as calling the plumber or electrician, or voting with your money at any merchants.

    In the medium and longer term the Govt needs to publicise it will be forcing licensed banks to rearrange their loan books to only lend on secured RE and physical assets(mortgages and liens)leaving a non-bank financial sector to unsecured and revolving credit. Ultimately the money supply will be tied to the former with calls to tighten lending criteria (percentage of VGs valuations, etc) as the only means of controlling money supply.

    If you think this is all too drastic then you’d better understand the facts of life. The Great Geriatrification has begun with a bang rather than the anticipated whimper. The US Fed has now undertaken pledges of around $1300 for every human on the planet and gold is now nudging US$1000/oz with US Treasuries at near zero interest. It takes a lot to halve an infinite issue bond price if interest rates rise from say 6% to 12%, but you need to understand bondholders reaction to any whiff that say a current bond return of 1% is headed for a marketplace of 2%, let alone 7%. That is every central banker’s nightmare now, the closer they all push interest rates to zero. Our Reserve should not go there and our Bailout Barons have to understand where they’re treading now.

  12. Alanna
    February 22nd, 2009 at 19:40 | #12

    Stuart# 44
    In reply to your post at 44 on the benefits of the lowering of protection;

    I am not saying reductions in protection have not led to improvements in some countries internationally. Although in Australia I do think reductions in protection have led to rising inequality. There remain also many many countries still totally excluded from global markets even though protections have been removed who are unlikely to even have an internet connection and remain unlikely to participate in global trade.

    Asian countries and India and China have benefitted from the removal of protection (but some Asian countries have also suffered dumping from protected US agricultural industries).

    Global exports remain dominated by a few major exporting countries and the remainder import – the global market has its own unique concentrations and does not spread itself evenly and we have some large trading blocs (EU and US) that do nothing but argue and protection continues within. China has done very well but has not rushed headlong down the deregulation/ no protection path (refuse to). The US still protects its agricultural industries surreptitiously with things like marketing subsidies.

    Its not a blanket cure and the degree of participation in global markets should be measured, not enforced and should be case by case. The IMF has created some basket cases by intervening with open market prescriptions (latest one Ukraine).

    Australia, a small open economy – not a manufacturer’s paradise, and not ever likely to be one (too far away), and susceptible to being governed by concentrated oligopolies (population too small for volume markets) and somewhat dependent on mining extractions would probably find inequality reduced and higher employment with some investment in manufacturing and some protection over it.

    Do I sacrifice my own country’s economic health to see the world in better shape? I dont know – its a very hard call to be brutally honest.

    Its not just the rapid removal of protection, it was the rapid deregulation of financial markets. It was the speed, the haste and the combination, but more than that, it was the asssumption that it was for the best (and it was implemented relatively quickly – like in a decade or so).

    But there has been a failure to look back and examine real outcomes here in Australia (we lost blue collar manufacturing jobs – what else is there we can do – dont suggest tourism – its the last hope of every poor country in the world.

    Are we better off since the post war decades? No. Equality has deteriorated, unemployment is higher, underemployment is higher still.

    The Korean govt ploughed public investment into shipbuilding and it created a city. Yet the idea of public investment under neo liberalism in Australia is another major no no (ridiculous for a country of this small size a population – the government was once a solid employer). Apparently our governments now cant even invest in a two kilometre stretch of road anymore without needing a private partner to hold their hand and charge a toll.

    Blanket free market, no protection open trade remedies leave me quite cold when I cant see them doing any good in our country. Call it selfish but most ordinary citizens would view it the same way.

    If extraction is our only area of global comparative advantage, then just consider the fate of Nauru. Its a short term advantage.

    Case by case for such remedies, and unique characteristics of the economic circumstances of the individual country is important, along with timing, which is only what Stiglitz suggested. Once again it involves economists doing the hard yards, not just imposing a perfect model.

  13. Alanna
    February 22nd, 2009 at 20:27 | #13

    Stuart# 58
    Private US organisations can now sue our government as a result of the FTA. is that a difference? It sure is.

  14. Alanna
    February 22nd, 2009 at 20:52 | #14

    Observa#56
    That is a very amusing comment!!

  15. Alanna
    February 22nd, 2009 at 20:54 | #15

    But Observa, you give pay too far too much respect to the Austrians.

  16. Alanna
    February 22nd, 2009 at 20:56 | #16

    As I said Austrians are better at managing restaurants. They do slow cooked lamb dishes very very well.

  17. wizofaus
    February 22nd, 2009 at 21:56 | #17

    Terje, it might well be that banks *can* continue to do business while bankrupt, but do you have an example in history of allowing a major bank to go bankrupt with a positive outcome? I don’t know about you, but if my bank declared bankruptcy tomorrow I’d be very quick about transferring my loans/deposits elsewhere, as would probably most other customers. On the other hand, were it to be temporarily nationalised, I would continue to use its services until there was some obvious reason not to.

  18. wizofaus
    February 22nd, 2009 at 21:59 | #18

    FWIW, I see that Stiglitz supports the bankruptcy idea, but I suspect you would strongly disagree with his proposal for what to do in the aftermath, which is basically to create a new state-run banking system (most likely temporary, but surely someone like Stiglitz would be well aware of the likelihood of it remaining state owned for quite some time).

  19. Alanna
    February 23rd, 2009 at 09:28 | #19

    Observa#61
    “They then have a stake in the solvency of the bank even to the point of forgoing dividends.”

    Would you rather have your hard earned savings as cash in hand or a take in solvency (or possible insolvency of a bank ie a take in uncertainty)? If it was me – at the first whiff of this idea I would have wanted my money moved straight out to an Irish bank that was guaranteeing the lot.

  20. Alanna
    February 23rd, 2009 at 09:29 | #20

    They would have to close the exit doors first Observa.

  21. wizofaus
    February 23rd, 2009 at 11:03 | #21

    Oh and Terje to anticipate your requesting of example of nationalisation of a bank having a positive outcome, I’d be interested in your take on what happened in much of Scandinavia (especially Sweden) in the early 90′s.
    Even the WSJ has printed articles in praise of the wide-reaching state inventions that occurred at that point. On other hand, nobody seems to believe much good came of letting Lehman Brothers go bankrupt (at best it might be said that it will act in future as a warning that no bank should assume it always will have government backing).

  22. observa
    February 23rd, 2009 at 12:45 | #22

    We’ll see who cooks those poor sheep best Alanna. I see Obama is promising to halve the US deficit in his term while Hilary trots around the rice begging bowl-
    “By continuing to support American Treasury instruments the Chinese are recognising our interconnection. We are truly going to rise or fall together,” Ms Clinton said at the US embassy here.
    And Confucius say another lefty friend in need is a friend indeed which broadly translated means, we’re all in this together interfering comrades.
    As for our shiny new ‘fiscal conservative’ kid on the block cutting that deficit in half, I’ll let these blokes explain it to him-
    http://www.brookings.edu/~/media/Files/rc/papers/2009/0219_fiscal_future_gale/0219_fiscal_future_gale.pdf
    The lead in abstract will do just fine but in particular to all those ‘fiscal conservatives’ in Canberra take note -
    “Recent trends in credit default swap markets show a clearly discernable uptick in
    the perceived likelihood of default on 5-year U.S. senior Treasury debt, a notion that was
    virtually unthinkable in the past. While it is difficult to know exactly how to interpret
    these results, it is clear that – although fiscal policy problems are usually described as
    medium- and long-term issues – the future may be upon us much sooner than previously
    expected.”
    An oblique reference to demographics there perhaps?

    As for Ozzies doing their banking from Ireland I’d worry a wee bit about those union types in the streets already, as well as paying the bills and copping currency exchange fees, not to mention the exchange rate risk. Whatever tinkles your fiscal conservative bell I guess. Who am I to tell free women how to manage their own finances?

    As for that blanket bank guarantee with the kids’ taxes, I’m dead against it and hence my solution for a bunch of oldies covering their assets at present, but there are other unselfish, intelligent baby boomers about with similar concerns-
    http://woodwardhall.wordpress.com/2009/02/23/the-right-way-to-create-a-good-bank-and-a-bad-bank/
    All I can say to the kiddies is there’s a missing verse to all those old tossers strutting about at present humming- ‘Imagine all the people living for today…’ and it’s simply- ‘Won’t tomorrow be a bummer!’

  23. Alanna
    February 23rd, 2009 at 14:56 | #23

    Observa – you do have a point about the E/R – mattress looking better pro tem then may as well shop for a nice white shiny stone. The only trouble with women trying to manage their money is that males in banks (well mostly males) have made a monstrous mess. Better idea, hand it over to your wives in the Householdbank, like you all should have done in the first place.

  24. Ernestine Gross
    February 26th, 2009 at 10:06 | #24

    Terje, Sorry for the delay in responding. I overlooked your comments at 52 and 53.

    Re 52: You propose that depositors of insolvent banks take over the management and you suggest this is a pragmatic approach. However, your proposal is not an idea I would associate with the term ‘pragmatic’ because: For any one bank at any time, the category of depositors may includes individuals with or without criminal records in one or several national jurisdictions, the legal representatives of private corporations, publicly listed or not in one or several national jurisdictions some of these corporations being in a state of financial distress or entering the state of insolvency, legal representatives of non-profit organisations and various levels of governments, and, last but not least, the legal representatives of other banks and non-bank financial organizations such as stock exchanges, equity funds, hedge funds. Some individuals (persons) may be depositors with any one bank in several roles. I consider your proposal as practically unworkable even if only one bank would become insolvent during an accounting period. The reality is that the entire financial system is not working. [The word ‘may’ is appropriate because it qualifies the conditions “any one bank at any time”].

    Re 53: I refer to my reply to PML’s criticism at 59. [As for ‘private property’, I wouldn’t mind at all if you could achieve an improvement in property rights for something as essentially private as a house that serves as a home by having legislation that prevents aircraft noise from intruding into this private property in a measurable way.]

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