Krugman: Nationalization fears (he explains what exactly the stock market is reacting to)

[Pirate Smile]

Nationalization fears
So everyone agrees that fears of nationalization are driving bank stocks down. That’s probably true, but those fears have to be carefully interpreted.

We are not talking about fears that leftist radicals will expropriate perfectly good private companies. At least since last fall the major banks — certainly Citi and B of A — have only been able to stay in business because their counterparties believe that there’s an implicit federal guarantee on their obligations. The banks are already, in a fundamental sense, wards of the state.

And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders.

What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.

http://krugman.blogs.nytimes.com/2009/02/20/nationalization-fears/

[Greyhound]

1. Beat me to it. K&R.

[sandnsea]

2. Nationalization Means Full Economic Collapse

That's what the stock market is reacting to. The US is not Europe. We would never nationalize a bank for any other reason and Wall Street knows it.

[Cleita]

3. You are saying that the only reason we would nationalize a bank is

to cause full economic collapse? Your post isn't making sense to me.

[sandnsea]

4. No.

I'm saying the banking industry is going to collapse so the only answer is to nationalize because the only money that is available is going to be what the government prints.

I am saying it is going to be worse than the Depression.

[Fla Dem]

15. Nationalizing Citi and BOA is not nationalizing the whole banking industry

I realize these are 2 of the largest financial firms in the nation, if not in the world. But what of small regional banks. What of mutual fund companies? Don't they all play a role in the national financial industry?

[sandnsea]

22. I think they're too intertwined

Our two local banks, that are top rated, have lost 80% of their stock value in the last year. How much more of this do you think local banks can take? The reason there hasn't been a run on these banks is because most people are humming along in the belief that local banks haven't been part of this and aren't hurting. The papers aren't reporting the losses, I looked. I had to dig to find out what was going on with these banks.

Still feel safe and comfy with the thought that the two biggest banks are so broke the government has to take them over?

[Fla Dem]

16. dupe post

[galileoreloaded]

32. Precisely correct. I posted this elsewhere, but trying to put a floor under housing is futile

and wasteful as well..... look at this chart... Bubbles burst, and there IS no money other than Government money.

Lets save some for services when we really need them.....Flame Away.

[DBoon]

11. I think he meant the other way around

The US is so averse to government ownership that we would only resort to this to avoid a complete catastrophe

Unlike other countries, there is no socialist movement calling for nationalization as a means of public control

[sandnsea]

20. Exactly n/t

[ThomWV]

5. Nationalization will more likely mean partial economic restoration.

[sandnsea]

7. Not in this country

I swear people do not understand where they live. This is not Europe. People will freak out if they nationalize banks. It won't be done here unless there is a complete economic collapse, all the money is gone and there's no other choice. It will take at least a decade to get anywhere near normal if that happens.

[On the Road]

8. It's Not Necessarily an Either/Or

AIG is 70% nationalized and you haven't heard a peep in months.

[sandnsea]

9. Nobody knows what the fuck AIG is

or what they do. Everybody knows what a bank is and what it means when the government has to take it over. It means we're broke.

[tkmorris]

12. And even fewer know what "nationalization" means

[sandnsea]

13. lol, why the denial?

Of course people know what that means.

This place quacks me up.

[On the Road]

14. When the Government Owns 70% of the Company

so far no one has batted an eye.

I think it's a huge extrapolation to conclude that government ownership of large banks in any form will result in a depression greater than the 1930s.

[sandnsea]

19. Because nobody knows what AIG is

What part of that do you not get?

I didn't say nationalization would result in a Depression - I said nationalization would mean we're ALREADY THERE. They wouldn't do it unless it was that bad because of the economic backlash nationalization would cause. You're already seeing it with the DOW these last few days, and that's just on mild rumors.

[On the Road]

33. You Are Making the Assumption That Nationalization

would mean financial collapse is irreversible. The feds have already shown they're willing to act preventatively when necessary, and the interventions are getting politically easier over time. Whatever the prospects for the ecnomy, it's an enormous assumption to base a whole economic forecast on.

[girl gone mad]

17. Even Republicans are calling for nationalization at this point.

You're way behind the curve.

[sandnsea]

18. Doesn't matter, it's still stupid

People can live in lalaland all they want, including the almighty Krugman. If they nationalize, people better figure out where they want to hunker down for the next ten years because it is going to get U-G-L-Y.

[closeupready]

21. It'll be ugly for about six months to a year. Then we'll be back in business.

n/t

[sandnsea]

23. I hope you don't truly believe that

We're in freefall and the only hope there is is some irrational exuberance to stem the fall long enough for a little of this stimulus to kick in and maybe we'll skid to a stop before we burst into a ball of flames.

[closeupready]

24. I'm sorry, I don't know what any of that hyperbole even means in plain English.

Suffice it to say, the banks are running their affairs badly, and we need to 1) get them out; 2) get lending again; and 3) do something about their various assets, esp. the toxic ones. Nationalization lets us do that efficiently.

[sandnsea]

25. No Money?

Do you know what nobody has any money means? This is not just about some banks running their affairs badly. We are way way beyond the banks need to get lending again. The money is GONE. Poof, with the burst of the bubble. There's nothing to lend.

And if the credit card companies have done the same thing, as has been reported, we've got trillions more - poof - gone.

This is not just about some banks making some bad mortgage loans. The scope of the economic problems are monumentally beyond that. Trillions and trillions beyond that.

[closeupready]

26. You realize you are making the case for nationalization stronger, don't you?

The government takes them over, prints up a bunch of money, and presto, we're back in business.

[sandnsea]

28. Just. Wow.

Shakes Head.

Alrighty then.

[girl gone mad]

35. Explain to me why..

government intervention involving injecting zero interest money into banks and giving them the full faith and credit of the US government with nothing asked in return is good while government intervention involving accountability in exchange for cheap loans is "stupid".

[sandnsea]

36. Accountability is fine

Accountability in exchange for loans is fine. Government ownership of banks is something else again, especially banks as big as Citi and BofA, and it will freak the country out and send us all the way to the bottom in a week. Now if we're going to go there anyway, what the hell, get it over with. But if there is any chance we can turn this without complete collapse, then we need to do it. This isn't Europe. US citizens will not react calmly to government owning banks. Mind you, *I* don't care, I'm just saying what the reaction will be which is obvious with the way the stock market has responded to just rumors of nationalization.

[girl gone mad]

37. Nationalization is not going to "freak the country out"

That's a right wing talking point.

[sandnsea]

38. As is the stock market plunge

Just a right wing talking point. And the Administration working double time to squash the nationalization rumor. Just a right wing talking point. You Betcha!

:crazy:

[closeupready]

27. What does, "The US is not Europe" mean? We don't need Geography lessons.

By the same token, high-speed rail won't work here because the US is not Europe. Social security will not work here because the US is not Europe. Winemaking will not work here because the US is not Europe.

I'm sorry you have to make your arguments better than that.

[sandnsea]

29. Print up a bunch of money and we're good to go!

And I need to make better arguments???

Human Psychology. The US isn't Europe. The US responds differently to the economy than Europeans do. If you don't know that, I can't shoot it up your ass and make you understand it. You either know it, or you don't.

[closeupready]

31. Wow. Just wow.

AAAAAAAAAAAHHHHHHHHHHH AAAAAAAAAAAAHHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

:rofl: Plonk.

[sandnsea]

34. Here. Read.

This is JUST ONE. Stop being an idiot. This is serious.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1MrBhVi9fmA&refer=home

[TahitiNut]

6. The poor babies just heard that Santa Claus won't visit them a fourth time this year.

Fuck 'em. :shrug:

[Blackhatjack]

10. Both of these have been playing a shell game and likely have insolvent for some time

When B of A completed the purchase of Countrywide Mortgage, the rumor was that it was cheaper to absorb the huge debt Countrywide brought with it than to allow Countrywide to file bankruptcy and disclose all the $$ they borrowed from B of A and wouldn't be paying back. This would have been such a hit that close scrutiny of the B of A balance sheet would likely have taken it down.

No one of any substance can explain Citi's continued existence in its present form --unless you add a value to the implied government backstop --so in essence you are relying on the US Govt's assets as a basis for continued holdings in the company.

[Cleita]

30. Economists, just a thought and a question because being a

relatively poor person I don't know that much about markets and securities. What if the government did something as draconian as nationalizing all failing companies on the stock exchange and freezing all assets within the USA for a short time until this could be accomplished? Then starting from scratch, re-regulating the corporations, dividing them into smaller more manageable corporations that don't own everything, making them solvent and profitable and then returning them to the private sector, with of course new executives in charge and new rules that they must operate under? Would this cause armageddon if it were done in a smart way?

I just have a problem with companies that are beholden only to themselves and the business practices of the past twenty years that allows executives to take over a company, sell off all its assets and then walk away with all the profits leaving the companies bankrupt. It seems most of the companies have had to follow suit to stay in business in the recent past and it seems to me that the only way to stop it is to reinvent the wheel so to speak.

[girl gone mad]

39. I'd like to see a nationalization program that involved something along those lines.

with the newly nationalized banks required to lend money to businesses that build infrastructure, recover resources and reestablish a manufacturing base here instead of lending money to buy mountains of cheap Chinese plastic garbage.