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So Should We Nationalize?

By John Dietz - Email Editor

Date : February 24, 2009

Dear Valued Reader,

Is it time to buy stock in your mattress instead of your bank? It is sobering to think that your mattress may be worth more than the stock you own in a bank.

The White House has denied that they are considering nationalizing the banks, and as of this writing, press secretary Robert L. Gibbs went on hind legs to confirm that the White House plan is not to nationalize banks. Is this Washington's code for Congress to go out and sell this idea and get the Americans on board? Only time will tell.

So what is nationalization? Here is what The Encyclopedia of Britannica states:

Alteration or assumption of control or ownership of private property by the state. It is historically a more recent development than and differs in motive and degree from “expropriation” or “eminent domain,” which is the right of government to take property for particular public purposes (such as the construction of roads, reservoirs, or hospitals), normally accompanied by the payment of compensation.

If nothing rings right in your brain, it shouldn’t. The press is shoving the idea as though it is as American as apple pie. A New York Times weekend piece exclaims that a nationalization of banks is a "once-and-for-all fix". Wow, even the generalizations scare me, and I bet I am not alone forecasting future trouble. The thesis goes something like this; (A) the government would identify the toxic assets, (B) gain an assessment, and (C) recapitalize where they needed to get the banks trusting each other for normal relations, and the end result is more interbank lending.

If I had to point to the trouble, it would be “B” “gain an assessment.” This may be where the game of good bank/bad bank is the snag to future success. The banks are attempting to keep the “good assets” and will offset their insolvency by selling the “bad assets” to the government (hold this thought).

So, what factors contribute to the overall effect? How will fair-value of the toxic assets be determined? And what is so bad about it?

One word comes to mind – minutia.

The model that has been pointed to for success (or at least an example of success) is the Swedish model. I must say, the people and the land are truly magnificent; if you have not been to Sweden it is a place to visit. We are traveling to Sweden today for a different reason; we are discussing their banking prowess.

There are many examples in history where banks collapsed, real estate markets fell and unemployment and inflation were out of control. Let’s go back to the 90s in Sweden when the banking crisis accounted for a 12% loss of GDP. They too went through a housing bubble that saw prices fall 25% and by 1993 nonperforming loans reached 11%. The local currency fell by 30%.

It seems that “using restraint” is a universal conception of what nationalization means for banking. There are many more aspects to become concerned over during the process of nationalization. What happens within the innerworkings of policies is that the government becomes a sort of “private owner” or “chief executive officer” making the big decisions and the small decisions (who to hire and who to fire). This is part of what did happen in Sweden according to a study by the Cleveland Federal Reserve by O. Emre Ergungor.

The Swedish government took decisive action, or so the story goes. In late 1992, the government guaranteed all bank creditors, but not the shareholders, with no limit. No one questioned the government’s solvency or ability to perform, and therefore, life went on as usual.

Then the entire recovery seemed to spin out of control for reasons that economists now claim should have been foreseen. The government’s defense systems and inner contracts became involved with financing from the “bad banks” enhancing private interest, creating greater debt and pigeonholing control. Then inflation occurred, opposite rising debt and unemployment. International borrowing was held back, (mostly by the rise of the U.S. dollar), and the GDP of the Swedes took a beating.

Independent analysts claim that the banks were not run with the same care as a true private sector owner; bad assets that were dumped in great volume began to take their toll on the market. On top of it, the toxic assets values at “fair market” were now subject to the personal advantage of the person making the decision. If there is one thing that will disrupt a mathematical formula, it is human decision.

In the 70s Sweden had one of the highest income levels in Europe and that is all but a glimmer. Sweden’s output decline since then, and the entire fall in Sweden’s relative income, is directly connected to the banking sector according to the newly formed nationalized toxic asset banks, Securum and Retriva. (Remember--hold that thought?) These are the very large banks that the Swedish government pushed many of the toxic assets into and thus are the “bad banks”). We know these banks lost $2.8 billion in taxpayer’s money, and no one can figure out how much money the government lost.

If you believe that the Swede’s solution is what we should do, and it is without a doubt the best one to look at, I suspect you have thrown all of our corporate leaders into the Enron category, and I get that! My concern is that Americans are so forlorn over their losses and pensions that they will not analyze the big picture with due wisdom. If past analogies hold true, the majority of Americans are counting on magic. You are going to see a long slow leak of statements like, “it’s going to take time.” One purpose I have for this writing is to bring a realistic standpoint to the situation. Making the assumption that Tim Geitner and Larry Summers are the answers to our prayers, and somehow the government will fix this, is shouting at the wind.

Many leaders are now prefacing their statements with comments like, “It is a better solution than doing nothing.” If I, through this writing have not offered solutions, I believe that I can offer some wisdom from my many years of dealing in Asset Protection.

I think the root of Asset Protection provides foundational insight. Doing nothing is indeed a bad attitude concerning your assets and would be of similar transparency concerning our banking system, but we do have to dissuade Americans from keeping their money in their mattress.

Until next time,

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