Morning Edition


Reader Laurie sent this note from an NPR Morning Edition. The following quoted section caught her attention, and she wondered what was wrong with the explanation. It made me wonder if other readers had similar questions, even though we have covered part of the question of nationalization (as have Roubini and Krugman) here, here, here, and here.

Update: I also suggest Laurie go here for a thoughtful context on the word ‘nationalization’.

Update 2: Dean Baker addresses the issue on NPR rather directly as well. (hat tip reader JLundell)

Morning Edition, February 18, 2009·

NPR’s Ari Shapiro asked economist Raghuram Rajan of the University of Chicago Booth School of Business what determines whether a bank falls into the category of “dead men walking.”

Or should the government just say, “We’re going to buy you up so we don’t have to keep dumping money into you”?

There is this question of nationalization that keeps coming up. When the government actually owns these banks, it becomes responsible for all the liabilities of the banks. Supposing the government goes in and replaces the equity holders and says now these are government-owned banks. Then the government becomes responsible to all the debt holders who otherwise have made losses. In other words, with a nationalization, what you get is a transfer of wealth from the taxpayer to all the bondholders who earlier were dependent on the private bank to repay them. Now [they] can depend on the full faith and credit of the government to repay them.

Why do so many economists think we should do this now?

Well, I think some of it is driven by the sense that if we don’t nationalize, then these equity holders in the banks are getting a free ride where the bank can be run with government protection — where the debt of the banks is insured, the equity holders get all the upside, the government gets nothing for it.