Tuesday, February 17, 2009

Semantics we can believe in

You know things are bad when a libertarian economist like Alex Tabarrok is warming to the idea of large-scale government intervention into the banking sector. Just one thing: don't call it "nationalization":
"Notice how the term nationalization confuses the issue. First, it suggests government ownership of the banks, which would indeed be a disaster. People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership. Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside. That idea is a joke - there is no upside. Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.

The debate so far has been framed between a "bailout" and "nationalization." But the public rightly sees the bailout as a way to protect bankers and thus we get pressure for government ownership, which has already happened in part through government control over banker wages. Bankruptcy in contrast is a normal free market procedure, it emphasizes that the firm has failed and current management should be removed. Framing the issue in this way, for example, makes it clear that only the depositors should be protected and under reorganization there should be no control over wages on future management (wages are going to have to be high to get anyone to take on the task). Finally the idea of bankruptcy makes it clear that the goal is to get banks solvent, under new management, and back under private control as quickly as possible."
Like Tabarrok, I generally oppose nationalization efforts in which government operates specific industries. If you think the government could run a car company, for example, try driving around in this:

But what Tabarrok is describing is very different. Since the government already has a stake in the banking sector (through the FDIC, it is the main bank insurer), government-facilitated bankruptcy is much more "free-market" than keeping insolvent, but politically connected banks on life-support. Tabarrok explains:
"What would a private insurance firm do in this situation? Would it pander to the current bank management and carry the zombie banks on its books, hoping and waiting for a miracle? Or would it step in, remove current management, pay off the depositors, reorganize and then sell the banks to recoup its losses? I believe a private insurer would follow the second path, the fact that the government is not yet ready to do this indicates how powerful bankers are in Washington. Thus, given deposit insurance the procedure most consistent with free market principles is bankruptcy, preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field."
Despite the soon to be signed $800 billion stimulus package, the economy will not recover without a functioning banking sector. Bankruptcy won't be pretty, but it's better than being overrun by zombies.

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