The markets may not see it as necessary, but they’ve made no bones about it being evil. The mere mention of nationalized banks by a prominent senator sent the Dow Jones into a tail spin.
With good reason, too. Vladimir Lenin wrote an entire book about it with “On Worker’s Control and the Nationalization of Industry.” Mao Zedong of
Not very good company. But although many in the media haven’t recognized it, some of the talk of nationalization in the present-day
“It’s the time for nationalization, and I’ll say this,” Cramer said. “Either the new economic policy Lenin, or it’s the initial storm-the-winter palace Lenin. I’m not quite sure yet. It’s a mid-’20s situation. It could go either way.”
Although a recent Rasmussen Poll showed 75 percent of Americans oppose nationalization, and despite all the negative publicity the term has been associated with over the past 70 years, some in the media don’t seem to understand its history and consequences.
Bank Nationalization: Seeds Sewn By Politicians
With fears that the American banking system is teetering on the verge of collapse, and banking giants Citigroup (NYSE:C) and Bank of America (NYSE:BAC) are struggling, political figures in
Senate Banking Committee Chairman Sen. Chris Dodd, D-Conn., often considered as the most influential member of the Senate regarding the oversight of the banking industry, created a market turmoil when reports surfaced that he suggested in a Bloomberg Television interview that nationalization might be the only option for the government to save the banking system.
“I don’t welcome that at all, but I could see how it [nationalization] is possible it may happen,” Dodd said on the Feb. 20 “Political Capital with Al Hunt.” “I’m concerned that we may end up having to do that, at least for a short time.”
Reports of Dodd’s remarks sent the Dow Jones Industrial Average (DJIA) reeling more than 200 points (nearly 3 percent), until White House Press Secretary Robert Gibbs squelched those rumors later in the trading day.
“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,” Gibbs said at the Feb. 20 White House press gaggle. “[I] think I was very clear about the system that this country has and will continue to have.”
That caused the Dow to rebound, even briefly reaching positive territory before finishing down 100 points.
And the notion of nationalization isn’t something propagated by just Democratic politicians. South Carolina Republican Sen. Lindsey Graham also suggested it was a possibility on ABC’s Feb. 15 “This Week with George Stephanopoulos.”
“This idea of nationalizing banks is not comfortable,” Graham said. “But I think we’ve got so many toxic assets spread throughout the banking and financial community, throughout the world, that we’re going to have to do something that no one ever envisioned a year ago, no one likes. To me, banking and housing are the root cause of this problem. I’m very much afraid any program to salvage the banks is going to require the government ... I would not take off the idea of nationalizing the banks.”
On Feb. 17, the next trading day after Graham’s comments and the same day an article in The Washington Post by Matthew Richardson and Nouriel Roubini called for nationalization, the Dow fell 297 points. .after
And the prospect of bank nationalization was reflected in comments from Jeff Macke, founder and president of Macke Asset Management and a co-host of CNBC’s “Fast Money.”
The financial markets don’t react lightly to talk of nationalization.
However, the opposite holds true when nationalization is ruled out, as Federal Reserve Chairman Ben Bernanke did in remarks to the Senate Banking, Housing and Urban Affairs Committee on Feb. 24.Bernanke was asked whether the stress tests will lead regulators to move in to take outright control of some banks under powers used to deal with failing institutions.
“No, I don’t think so,” Bernanke said to the committee.
According to the Feb. 24 Financial Times, Bernanke stated he did not believe that outright nationalization made sense. “I do not see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just is not necessary.”
At the end of the trading day, the markets had responded positively. The Dow advanced 236 points.
Media Anchors: What is this ‘Nationalization’ You Speak Of?
Although it has been shown that the financial markets have adverse reactions to federal government hints of possible nationalization of the banking system, members of the media have been less concerned over the implications.
In a Feb. 24 interview with FDIC Chairwoman Shelia Bair, CBS “The Early Show” co-host Maggie Rodriguez didn’t invoke names of Chavez or Castro when she brought up the possibility of nationalization, but instead referred to it as the “n-word” or a “necessary evil.”
“I can’t think of a better morning to have you here, because all the talk is about the bank and if you look at the cover of The Washington Post, there it is, the n-word, 'nationalization,' which you have said you would be surprised if we get to that point,” Rodriguez said. “But isn’t it maybe going to be a necessary evil?”
In an interview following a Feb. 23 segment about bank nationalization with correspondent Betsy Stark, ABC “World News” anchor Charles Gibson wasn’t sure about nationalization being such a bad thing.
“I’m curious why nationalization is considered such a dirty word,” Gibson said. “The Obama administration has been at pains to say we’re not going to nationalize the banks. But a lot of economists, and you heard some there, say this actually could be a positive step if the banks were – a couple of banks were taken over for a couple of years.”
Stark had to explain to Gibson why this was not such a great thing for the government to do.
“If banks are taken over by the government, then private investors could see the value of their shares either severely diluted or wiped out altogether,” Stark said. “But the other thing is philosophical. Wall Street is the bastion of free market capitalism. And nationalization, even if it's meant to save the banks, is something that happens in socialist countries. It's not supposed to happen in the
NBC “Today” weekend host Lester Holt showed similar naïveté about nationalization, not recognizing the ideology the practice is associated with. Following a segment about the banking woes on the Feb. 22 “Today,” Holt asked NBC correspondent Scott Cohn how nationalization rumors could possibly be so bad.
“We look at Bank of America, Citibank, as [CNBC correspondent Trish Regan] noted in that report, got hammered. This rumor of a nationalization of the banks – oh my, Wall Street goes nuts.” Holt said. “Why? First of all, what does nationalization mean? And why did Wall Street react so negatively to just the hint?”
It Sounded Like a Good Idea at the Time: Consequences of Bank Nationalization
Nationalization might not be so bad if the government could be relied upon to manage it back to health according to sound business principles. But to the government, politics is paramount.
Any sort of government involvement in the private sector, whether it is loans under the Troubled Asset Relief Program (TARP), or all-out government nationalization, will have strings attached, according to economist and Business & Media Institute adviser John Lott.
Lott, in a Feb. 23 op-ed for FoxNews.com, explained how the government might try to force nationalized banks into engaging in risky behavior they otherwise would avoid. He warned that the temptation to score political points by those in power could be tough for the banks to overcome.
“Over the last couple of decades the federal government used regulations to force banks to give mortgages to people the banks thought were too risky – people who couldn’t make down payments and may have only had income from welfare,” Lott wrote. “With the government owning the banks, banks may be asked to fund all sorts of politically desirable borrowers. The problem now is that with government ownership – instead of just regulations – the political pressure might be much harder to track.”
Lott also warned that the ebb and flow of the free market is interfered with when the nationalization occurs in the banking system. He concluded the federal government would have an advantage over the private sector, which would prevent the market from operating efficiently.
“Economists have also argued that government owned companies frequently charge less than the cost of their products – in other words, they engage in predatory pricing. In this case, nationalized banks backed by the federal government might charge lower interest rates than private banks, forcing the remaining private banks out of business,” Lott wrote. “The point isn’t that banks are bad investments. The problem is that nationalization will make banks into bad investments.”