Reuters is reporting that many
analysts are sceptical of the desirability as well as the effectiveness of any form of nationalization of US banking sector. A variety of arguments are being offered by these people in support of their stand against such a move:
- It is insufficient to stem the slide in fortunes of the receiving entities, e.g., Citigroup
- It is detrimental to the interest of the shareholders
- It will also penalized "relatively healthy" banks as investors will offload their stakes from the entire sector
- It poses a question of moral hazard as the government will play a dual role, that of the regulator as well as that of the benefector
- It will lead to such calls from other sectors also, most notably the automobile sector
While all of the above arguments are valid, they miss a simple & oft-repeated, yet crucial, point - the current crisis is unique in more ways than one and that it will require unique approaches to solve it
At a fundamental level, all of the above objections can be boiled down to the analysts' firm belief in the traditional definition of capitalism and the US role as the epitome of a free market society. However, capitalism has come to be the dominant economic
theory precisely because of its ability to evolve and adjust to the prevalent socio-economic conditions. To use a software-terminology, capitalism comes in many flavours - from the unadulterated Friedmanian version to the moderate Keynesian version
Coming to the question at hand, government taking majority control of (for example) Citigroup will help in the following ways:
- It will ensure that Citi will survive, no matter how much more losses it has to absorb before the current crisis ends
- It will benefit the investors and the stockmarket in the longer run by forcing them to be more realistic about the returns that they can expect from a company and make them directly take on the risks that come with unrealistic expectations
- It will encourage other, so-called "healthy" banks to be more forthright about their real fiscal positions - I still don't understand as to how can there be such a huge gap in what Citigroup wants to convey ("we're one of the strongest banks")and what the
market wants to believe ("it is a gone case")!
- There cannot be such a big conflict of interest in the current scenario; the US govt stands to lose as much as any other stockholder and it would want the regulators to be more effective & efficient in safeguarding its interests
- It will comfort the broader national and global economy is that the US is indeed "walking the talk" as far as tackling the crisis heads-on is concerned. One should not under-estimate the psychological impact of such a move on the people as well as the markets
Last but not the least, the analysts should not forget that this is purely a temporary measure and can be rolled back as & when the situation so permits!