Nationalization Again, and Again

Others have made this point but nobody seems to have put it across so I'll just have to do it myself (sigh).

We can and should "nationalize" the banks, but it need not scare us if we do it right. There is a right way, and a wrong way.

The wrong way: Mexico took over the banks and kept them for 20 years and made a royal mess of everything. Compare Italy: Mussolini nationalized some industries inthe 1920s and the Italian government still has them, where they serve as nothing but a milch cow for politicians, and a drain on GDP.

The right way: the way we do it all the time. The regulators swoop in on a Friday night. They spend a long weekend piling up the greasy pizza boxes while they try to get a fix on what is what. And they sell the asssets, free and clear of the liabilities--probably to a (former) competitor, who is happy to have access to all those customer accounts. Monday morning they reopen and nobody notices the new sign on the door.

This happens all the time with bank regulators. It is mandated by statute for stockbrokers under the Bankruptcy Code. It is nothing like a state-run cartel.

I said "free and clear." That means the buyer does not have to worry about the liabilities of the seller. We--the government, us, the taxpayers--sort that out later. Maybe some are guaranteed. Maybe some enjoy a de facto guarantee. Maybe others--the bondholders, the shareholders--just take it in the socks.

But that is how markets are supposed to work. If there are not enough assets to go around, then the shareholders get wiped out. And if there isn't enough to pay the creditors than they, too, do not get paid. But the assets are secured, and the system is put in shape to get rolling again.

There, everything clear this time? Good, now get with it.