Thursday, March 5, 2009

The Financial N-word

The N-word in the financial world is nationalization. Wall Street is in fear that the Obama Administration may be forced into nationalizing the major Wall Street banks. Nationalization strikes fear into the bankers' hearts - after all, what would they do without their cushy jobs and lavish bonuses?

The government has so far followed the Japanese approach to the banking crisis. The Japanese issued guarantees and piecemeal government bailouts which resulted in what are called "zombie banks". Their malfunctioning banking system has resulted in nearly two "lost decades" for the Japanese economy with virtually no growth.

The current US approach to the banking crisis has helped financial institutions conceal losses, favored shareholders over taxpayers, crippled our credit system and protected senior bank managers from the consequences of their stupid mistakes.

This approach must change and it must change soon! The government must step in and nationalize the banks that are insolvent. This approach, however, will be costly and painful. Most of the pain will be inflicted on US taxpayers who will have to pay for the multi-trillion dollar bill.

But the alternative - a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road - would truly be historic folly.

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