Sunday, February 22, 2009

Why Bank Nationalization Is So Scary

February 22, 2009 02:27 PM ET | Rick Newman | US NEWS

Scan the headlines, and you’d think it’s a no-brainer: The government takes over the most troubled banks, whips them back into shape, then returns them to the private sector in a few years. Problem solved.

Former Federal Reserve Chairman Alan Greenspan has advocated nationalizing select banks. Famed prognosticator Nouriel Roubini says it’s the only way to go, since the whole sector is effectively insolvent. Sen. Chris Dodd, chairman of the Senate Banking Committee, roiled the markets recently by saying nationalization may be necessary for awhile.

A federal takeover of Citigroup, Bank of America, and other tottering giants might end up being the only logical thing to do. But nationalizing such banks would be a desperate move, with no guarantee that it would accomplish anything the banks can’t do for themselves.

[See 4 myths about the Obama-Geithner bailout plan.]

Worst of all, a dramatic federal takeover might create expectations that the government can solve a deeply vexing problem overnight – then leave the nation feeling more distressed than ever when the move fails to stem vast losses, revive the credit markets or fix the foreclosure epidemic. Here’s why nationalizing the banks would be so draconian:

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