EC103-Topic#2: Nationalization & the Banking Sector & Zombies

Paul Krugman recently wrote about his support for the nationalization of banks amid growing support of the idea. Nouriel Roubini, has also written in support of bank nationalization, and believes that this should occur sooner rather than later. The credit crisis which began several months ago, continues as banks are unable to raise enough private capital to offset the amount of writedowns that are necessary to remain out of the “zombie” state. The current plan of the Treasury Department is to run “stress tests” on the banks that have received TARP (Troubled Asset Relief Program) money to see which banks are most susceptible to failure. On another front, the Fed has recently been altering the structure of a different acronym, the TALF (Term Asset-Backed Loan Facility) to try to get credit flowing again.

I would like you to consider the options that have been proposed to fix the financial sector.

1. Do you believe that nationalization of the banking system will resuscitate these “zombie” banks? Try to find supporting evidence.
2. What do you believe would happen if these banks were instead allowed to continue without more assistance or nationalization?
3. Try to explain how one of these “acronyms” is designed to work, and in your judgement if it is working.
4. Compare the problems that our financial sector is going through to those of another country that has faced these issues. Most notably, Sweden and Japan have faced financial crises in recent times.

For each of these, you need to find your own sources (there are many stories out there). You should NOT use some random blogger’s story or Wikipedia to support your opinion. You should go BEYOND the articles that are listed here. If you are unsure of a definition, look it up, and try to dig deeper. Try to stick to reliable news sources and facts. Remember that for these assignments you need to put forth your opinion and back it up with facts.

(Lastly… a good and humorous explanation of how mortgage backed securities got us into this mess)

28 thoughts on “EC103-Topic#2: Nationalization & the Banking Sector & Zombies”

  1. The nationalization of the banking system and of big banks as well as smaller banks that have seemingly become insolvent seems to be a realistic possible bailout for the troubled banking system. It seems that even big banks (which many people believe are “too big” to go under) have too many toxic assets and too much illiquidity to resume normal lending: They are “zombie banks,” without proper capital to positively influence the economy. Without lending between banks and to consumers, there can be no growth and the country will not be able to pull itself out of this crisis. Nationalization can facilitate the paying off of some debt and the cleaning up of the institutions. Additionally the federal government, while in control of some banks, can resume lending between banks, which has not been able to be accomplished by lowering the fed fund rate or quantitative easing. Nationalization of some banks would be another tool of the government to stimulate lending that otherwise would not occur. If the banks were allowed to continue without any more help, there would be no stimulation to propel them to lend and no way to rid themselves of numerous amounts of illiquid capital. Sometimes it is necessary for the government to take control for a limited amount of time in order to have the direct ability to stimulate action and facilitate recovery (a Keynesian perspective of government spending and involvement). It is important, however, that the banks are returned to private ownership after the government accomplishes what they can with the nationalization process in order to restore as much as possible public confidence in the banks without government ownership, and avoid too much government control in the system like economist Friedrich August von Hayek believed to be a recipe for the reduction of freedom. One problem that could potentially occur from nationalization is if a big bank, because of a stress test, is deemed insolvent and worthy of a government takeover, it may propel people to take their money out and put it in a place where they feel safer with their money (even though the government would be stepping in to help their bank). Many people moving their money around at the same time is painfully reminiscing of the great depression where many banks closed their doors and many people lost their savings. Though the F.D.I.C. was created for this very purpose, such a potential dramatic drop in confidence for a bank that warrants a government takeover is a real possibility. In the early 1990’s Sweden had a banking crisis of their own when many banks needed bailout money from the government. The Swedish government provided bailout money, however they had banks write down their losses and made sure that the banks that had taken the most risk pay towards their own bailout. This puts the responsibility back on the banks that should not have been taking such more risk than could be handled in the first place. They also split their central bank into good and bad assets, and asset management agencies were created to “assess the value of the non-performing loans they had inherited and then moved to rescue whatever economic value they could.” (Jackson, 4). These agencies were part of the government, however they were mainly independent and free from many of the regulations placed on banks. One way to learn from the Swedish banking crisis is to reiterate the point that banks that take such risks that they cannot manage the potential negative outcomes should not be able to receive a handout from the government and believe that everything is going to be ok. Playing with the economy in that way is dangerous and greedy, and though it is necessary to help some of those institutions it is also necessary to make them understand their compromising actions and have them help pay their own debt like what was done in Sweden. The assets held by US banks have to be assessed and the recovery process needs to begin in order to restore our economy and begin to restore the public faith in the system. Andrews, Edmund L. “As Doubts Grow, U.S. Will Judge Banks’ Stability.” February 22, 2009 Dougherty, Carter. “Stopping a Financial Crisis, the Swedish Way.” September 22, 2008."Ground Zero: Out of conventional ammunition, the Fed uses its balance-sheet to battle the slump." The Economist. December 20, 2008. Jackson, James K. “The U.S. Financial Crisis: Lessons From Sweden.” CRS Report for Congress. September 29, 2008. Krugman, Paul. “Banking on the Brink.” February 22, 2009. Nocera, Joe. “As Credit Crisis Spiraled, Alarm Led to Action.” October 1, 2008. Purvis, Andrew. “Sweden's Model Approach to Financial Disaster.” September 24, 2008.,8599,1843659,00.html Roubini, Nouriel. “'Nationalize' the Banks: Dr. Doom says a takeover and resale is the market-friendly solution.” February 21, 2009.

  2. I believe that nationalization of banks is the next step the government must take in attempt to fix the disaster created by commercial banks. As suggested by Walter Todd, a former Federal Reserve official now with American Institute for Economic Research, bank nationalization is inevitable when the money needed surpasses the capacity of taxpayers. The general public has little tolerance for watching their hard earned pay checks being given to banks that are still highly susceptible to failure. Furthermore, the lack of transparency on behalf of the banks regarding where the money from TARP is going within companies is causing negative feelings amongst the taxpayers. Nationalizing banks allows the government to take control of how money is spent, while simultaneously easing the minds of the population by insuring that money will be spent more responsibly. However, I do believe government intervention should be temporary. Once the government has “cleaned up” the mistakes made by the banks, they can put shares back on the marketplace.-Sophie CohenAlbert Bozzo. “Coming Attraction: Bank Nationalization?” Sam Stein. “Bank Nationalization: As American As Apple Pie”

  3. There really isn’t much left to do but to nationalize the banking system, and as a result of that, “zombie” banks will be resuscitated. This is the only way we can get back to a healthy private capitalist system. Sen. Charles Schumer stated that, he “believes that failed “zombie” banks, no matter what their size, should be taken over by the government, which should then wipe out shareholders, fire management, clean up the banks and quickly resell them into the marketplace.” (1) In addition, such a solution would in fact re-establish a lot of confidence into the banking system. Furthermore, the government should nationalize the entire banking system and then get rid of all the bad assets and “clean out the banks.” In a couple of years, the government can resell the banking sectors to private investors. I believe the entire banking system will fail if it is unassisted or not nationalized. More good banks will get dragged down into the mud along side with the bad ones and failing banks are unacceptable outcome for the US economy. According to the Jonathan Stempel, “between 50 and 150 U.S. banks, as many as one in 57, could fail by early 2010, mostly those with no more than a couple of billion dollars of assets. That rate of failure would be the highest in at least 15 years, or since the winding down of the savings-and-loan debacle.” (2)Troubled Assets Relief Program (TARP) is a government program created to restore stability to the financial system of the United States. I don’t believe Troubled Assets Relief Program is actually working. This is because, TARP’s objective was to restore stability to the financial system and none of goals have been achieved at this point. According to Paul Steinhauser, “the government’s financial bailout for troubled banks has not worked so far, a majority of respondents to a national poll say, and six in 10 don’t want Washington to spend more money on the rescue.” (3)The Sweden financial crisis was caused by housing bubble, resulting in a severe credit crisis and widespread bank insolvency. In response to the crisis, the government financial institutions by having the government take over the bad debts. (4) In addition, Sweden’s government assumed bad bank debts but the banks had to write down losses.(4) The economist Paul Krugman have proposed “the Swedish way” as a model for what should be done to solve the economic crisis currently affecting the United States. (5)The U.S. government should learn from Swedish on how to solve the financial crisis. This is because, the American crisis is noticeably similar origins to the Swedish crisis.1) Nkrumah

  4. I believe that temporarily naturalizing banks would help our crippled economy. Banks have abused their power and due to their irresponsibility hundreds of millions of American are now suffering. I see no reason why we should further trust these companies that have become leaches on our dying economy. Even when we give these banks money they still find ways to waste it and have shown no progress in fixing our economy. Nationalization would put people in charge who see the economy as their number one goal instead of profits. Nationalization would most importantly vaporize banks bad credit, which will help in the long run. Along with this they would stop banks from going bankrupt and create confidence in people concerned with the recession. Nationalization has also proven that it can work in places like Sweden and Japan so why not try it in America. If the government can fire inefficient bankers and replace them with suitable replacement then temporary nationalization has a good chance of working.Greising, David. “Nationalizing banks poses risk but other options look worse.” Chicago Tribune 2/24/2009 24 Feb 2009,0,3132308.column.White, Meg. “The irrational rationale against nationalizing banks.” Buzzflash 2/18/09 24 Feb 2009

  5. Potentially there are multiple problems with nationalizing the banks. Although some of the banks are already being considered zombie banks, “most big investors are panicking” (Norcera) and pulling their money from the banks. The whole idea of spreading contagion is affecting market failure even further. Morgan Stanley’s chief financial officer, Colm Kelleher mentioned, “these markets are behaving irrational. There is a lot of fear” (Norcera). The idea of nationalizing banks is only perpetuating this fear. Dave Rovelli, managing director at Canacord Adams acknowledges that the “uncertainty of waiting for results of theses stress tests is just killing the markets” (Andrews). Andrews acknowledges that the “introduction of the stress tests will dilute shares of Citigroup stockholders” (Andrews). This kind of dilution will only further discourage large investors and create a crutch for capitalism to rely on the government. This could “make it even harder to attract private money in the future” (Ailing). Furthermore there will be enormous pressure on the government to fix the problem in a timely fashion-what is the next step for the government if things don’t go well? The government can just as easily (as they are now) pump money into banks and private investors and have a private-public partnership without calling it “nationalizing.” Timothy Either, treasury secretary says that they want to “keep the major banks in ‘private hands’ and have no intention of nationalizing” (Andrews). The government obviously needs to help the banks get out of the banks their zombie state, however nationalization is not the capitalistic way and it will only develop a dependency on the government. It is a high risk (very socialist mentality) for something that has no guarantees. I believe that the executives of the banking industries (although have they have their faults) should still be trusted. Nationalization is one of those situations similar to spending against the wind where it is politically difficult and I will be curious to see if the banks nationalize and if they do, how soon they will implement. Nocera, Joe. “As Credit Crisis Spiraled, Alarm Led to Action.” October 1, 2008. Andrews, Edmund L."As Doubts Grow, U.S. Will Judge Banks' Stability" 'Stress Test' Anxiety" February 23rd, 2009. The New York TimesAndrews, Edmund L., Andrew Ross Sorkin, Mary Wiliams Walsh. "Ailing Industries Pressing to Add Billions to Bailouts" February 24th, 2009. The New York Times.Healy, Jack. "Buyers Flee as S&P and Dow Hit 12-Year Lows" February 24th, 2009. The New York Times.

  6. Currently the United States is experience a baking crisis similar to that of Sweden’s in 1992. Sweden’s banking system failed due to “imprudent regulation, short-sighted economic policy and the end of its property boom,” (1) turning many banks into zombie banks, much like many prominent American banks today. However, unlike the American government, Sweden did not outright bail our banks. Instead banks were required to inform the government about all losses and bad capital prior to government aid. This process made the banks responsible while simultaneously giving the government complete control over the bank. The government then sold all “distressed assets (…) [and] the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.”(1) Ultimately the Swedish government lost only two percent of their annual G.D.P, spending about 60 billion dollars, exponentially lower than that of the United States. (2)Because of the success of Sweden nationalizing their banking system, I believe nationalizing banks is the next logical step for the American government. Not only will it currently save the government money but it will give money back to the tax payers and government in time, with the selling of bad assets. (1) However, implementing this plan could potentially back fire if the government is unwilling to sell back the bank shares to the public, moving the United States further away form capitalism, one of the back bones of the country. 1. Carter Dougherty. September 22, 2008. New York Times Peter Vinthagen Simpson. September 20, 2008. The Local Anna Rivkin

  7. Our economy is undoubtedly in peril, so much so that nationalization may be necessary. However, while I do not condemn nationalization, with it come significant difficulties. Even whispers of nationalization are damaging by leading to shareholder withdrawals which, in turn, result in plummeting share values (1). This response is instigated by the fear of “the government wiping out shareholders,” which is not necessarily good for the economy either (1). Further, governments are, admittedly, “lousy bank managers” (2). However, many are now wary of those who created the current situation. Yet these economic top dogs are where they are for a reason—they understand economics. Thus, it may be beneficial for them to remain in control, especially because “now profits [are] less pressing than survival” (3). Similarly, in the famous words of Michael Douglas in Wall Street, “greed is good.” It was, is, and will be the insatiable appetite for profit that sustains and stimulates capitalism. Even if the government successfully ran a nationalized banking system, it would likely illustrate the major flaw in spending against the wind. A nationalized, non-profit banking system would directly benefit millions of people in need of loans. As a result, few would want privatized banks again, especially in light of their recent track record. Still, something must be done. It may be possible to allow bank failures and F.D.I.C. takeovers; capitalism necessarily kills bad companies, making room for new ones. Further, the F.D.I.C. could theoretically nationalize then privatize banks, breaking them down into smaller, improved banks, as suggested by Roubini (4). Rather than feeding taxpayer dollars to what are probably already insolvent banks, the money could be used to create new jobs or by the F.D.I.C. to repay bank investors.1. Andrews, Edmund. “As Doubts Grow, U.S. Will Judge Banks’ Stability.” NY Times. February 22, 2009. <>2. Sanger, David. “Nationalization Gets a New, Serious Look.” NY Times. January 25, 2009. <>3. Nocera, Joe. “As Credit Crisis Spiraled, Alarm Led to Action.” NY Times. October 1, 2008. <>4. Varadarajan, Tunku. “'Nationalize' the Banks.” WSJ. February 21, 2009. <>-Ross Jaffe

  8. During a time in which this country’s economy is falling apart, I believe temporary bank nationalization will ultimately resuscitate not only “zombie banks” but also the entire economy as a whole. The longer this country lives with zombie banks the longer and harder it would be to end our current economic meltdown. (2) By clearing bad assets and giving banks much needed capital, the government can hopefully put the banking system back on its feet and out of its paralyzed state. These banks are dangerously close to failing and are in dire need of government assistance. (1) By removing toxic assets from institutions’ balance sheets, the government can hopefully boost lending between banks and consumers. (3) However, Ben Bernanke, the Federal Reserve Chairman, made comments on Wednesday, February 25, 2009 in which he stated that the government does not plan to perform any actions “like” nationalizing banks. He stated that the government does not have to fully control banks in order to make sure these banks are “healthy and stable” but rather form a partnership in which the government will provide oversight and strict supervision. (4) I believe by assisting and giving banks more capital, the government can help prevent economic problems from getting even worse. Yes the concept of government control of the banking system is a step away from Capitalism and a step towards Socialism, but the hopeful positive outcome will far exceed any negative connotation that comes with the nationalization of banks. (1) Sweden, for example, was in a similar economic situation during the early part of the 90s. Sweden nationalized their banks and unlike the American proposal, held banks responsible by making them write down losses and issue warrants to the government instead of just bailing them out completely. (2) With Sweden as a prime example of a country that survived an economic crisis through bank nationalization, the American government can hopefully gain the trust of consumers and encourage bank lending in order for there to be some sort of economic growth. (2)Robert Feliciano1) Karydakis, Anthony. "In praise of nationalizing banks." February 17, 2009 26 Feb 2009 DOUGHERTY, CARTER. "Stopping a Financial Crisis, the Swedish Way ." New York Times September 22, 2008 26 Feb 2009 Chapman, Peter. "EU Says Bank Nationalization Is Toxic-Assets Option." Bloomberg February 25, 2009 26 Feb 2009 4) Comlay, Elinor. "Banks rise on nationalization, stress test hope." Reuters Thu Feb 26, 2009 26 Feb 2009

  9. I believe at this point nationalizing the banks has become a necessity. A somewhat successful plan I think can be imitated is Britain's approach to their banking problems. Britain solution was to partially nationalize their banks by having its Treasury buying up preferred shares from at least eight major banks and building societies. This has caused a significant recovery in trading on the London stock exchange. Also while I believe the nationalizing of the banks should only be temporary I do not believe there should be any rush to return to the banks back over to the people who ran them into the ground to begin with. While they might have certain skills that have allowed them to get their high paying jobs in the first place their high risk investments clearly demonstrates their lack of sound judgment. These “zombie” banks need to be dealt with quickly and is not something should be left on its own. I believe people who are afraid of nationalization are too caught up in a communist paranoia. Yes nationalizing the banks is a step towards socialization but in this economic crisis we cannot let ourselves make decisions on past prejudices. If calling the action necessary to save our economy nationalism is a “political liability” to use Roubini’s words, then call it “temporary receivership” and let’s start fixing this problem.

  10. Nationalizing the banks is becoming a more plausible solution to the banking crisis as banks continue to have money pumped into them by the federal government to avoid bankruptcy. I believe that the government should no longer continue giving the troubled banks bail out money and instead take ownership of the banks so that the bail out money can be allocated elsewhere. The government has already pumped billions of dollars into the banks in hopes to revive them, but the results have indicated little change. Therefore, the next logical step is for the government to nationalize the banks. Just last week, Ireland’s government took control of their crumbling banks by approving “a capital injection of 4.5 billion” into its major banks (1). Also, to avoid the same mistakes as Japan faced in the 1990s, the government should not delay their actions in nationalizing the banks. In the 1990s, Japan faced a similar economic crisis as their banks fell apart yet it took a decade for the government to take action to nationalize their banks. Due to the delay, Japan endured ten years of economic turmoil, with real estate prices dropping and the public’s debt increasing rapidly to the point that it was higher than the country’s GDP. The ten years where the government failed to nationalize the failing banks became known as the “lost decade.” Not until 2003, did the government step up and nationalize the major banks in Japan which at that point cost them over two trillion yen to stabilize (4). On the other hand, in 1992, Sweden was facing the same issues of an increase in insolvent banks, but took a more aggressive approach than Japan and implemented a government ownership of the banks. Sweden nationalized their banks and forced the banks to take responsibility by having to record their losses to the government (2). Therefore, in order to not make the mistakes that Japan made and capitalize on Sweden’s way of alleviating the financial crisis, the government must make a swift decision to nationalize the troubled banks to hopefully prevent our own “lost decade”. Although the government should nationalize the banks, the banks should not stay in the government’s control for long. There are several consequences that come from nationalizing the banks. First, the longer the government has control over the banks the harder it is to give the banks independent control again. Secondly, as “zombie” banks receive aid from the government, the banks that are surviving through this crisis will be harmed. With the failing banks receiving aid, the surviving bank’s shares will decrease causing them to be driven out of the business (3). Therefore, a clear plan to return the banks to the private sector must be part of the solution.- Caroline Sherman1) “Bailout Strategy” Feb. 24, 2009,0507881.story2) Dougherty, Carter. “Stopping a Financial Crisis, the Swedish Way.” September, 23, 2008. Grim, Ryan. “Schumer: Filed “Zombie” Banks Should be Nationalized” Feb. 20, 2009 Tabuchi, Hiroko. “In Japan’s Stagnant Decade, Cautionary Tales for America.” Feb. 12, 2009.

  11. I think that temporary nationalization of the banks is a good idea that will help resuscitate the banking system and alleviate the current economic crisis. Without nationalization, I do not believe that the banks will be able to survive. Currently, there is a problem with zombie banks, which are banks that are unable to supply credit that is necessary for the economy. Citigroup and Bank of America are examples of zombie banks; they are still running, but they are not lending (Krugman).According to Nouriel Roubini, the government has already provided between seven to nine trillion dollars into the financial system between guarantees, liquidity support, and capitalization. Thus, “de facto, the government is already controlling a good chunk of the banking system” (Varadarajan). “The government holds $52 billion of preferred shares in Citigroup, five times the bank’s market value as of Feb. 20. If the U.S. were to convert all of its holdings into common shares, it would own more than 80 percent of the company” (Christie). From these figures, one can see that a form of nationalization is already in place in the current banking system. These measures were taken to prevent even greater deterioration of the economy. Government intervention to temporarily nationalize banks is necessary.The TALF (Term Asset Backed Securities Loan Facility) is another government program like TARP that was designed to alleviate the economic crisis. It allows the Federal Reserve Bank of New York to give loans to issuers of asset-backed securities with the highest rating (AAA) from at least two nationally recognized statistical rating organizations. Then the Federal Reserve Bank of New York can use the asset-backed securities as collateral for loans that the issuers of the securities will use to create more asset-backed securities (Kiviat). The TALF seems to be working for the economy because it is allowing people to get loans and capital. According to Chip Rodgers, senior vice president at the Real Estate Roundtable, “without TALF support, borrowers would have a tougher time refinancing maturing debt and avoiding delinquency or foreclosure” (Lanman). The TALF will help create more capital for people.In 1992, Sweden faced an economic crisis that is similar to what the United States is currently experiencing. Sweden had a housing bubble that was unregulated and led to a grave economic recession such that its banks were practically insolvent. Unlike the current action being taken by the United States government, the Swedish government did not bail out the banks. Instead, they forced the banks to write their losses and take responsibility for their actions. The government took control of the banks and then sold distressed assets whose profits flowed to the taxpayers (Dougherty). Because of the difference in sizes of Sweden and the United States, the necessary economic actions to salvage the economy are different. Sweden did not have to spend the amount of money that the United States has been spending to resuscitate the economy. Thus, the two problems are not equal and therefore cannot be compared completely. However, the principles of the two crises are similar, which suggests that the ideas behind their solutions will also be similar just on different scales.James Yick Christie http://www20601087&sid=a_.0DJhF6ygY&refer=home Varadarajan

  12. The question of nationalizing America’s banks rests on two issues: the effectiveness of revitalizing the economy, and fairness to the American taxpayer. The government’s current efforts seem to solve neither of these issues. Mass amounts of taxpayer money are going towards keeping large financial institutions afloat, but the economy remains stagnant because banks are still unable to deliver adequate credit for economic resuscitation—thus the current “zombie” state of our banks (Krugman, 1). By merely cushioning the large financial institutions, we are only protecting the banks and investors that got us into the current crisis. It is, as Krugman describes, “lemon socialism: banks get the upside but taxpayers bear the risks” (3). Thus, simply bailing out the banks is not only ineffective but also unjust to the average American citizen. That the concept of nationalization has gone from “radical solution to almost received wisdom” in such a short period evidences its viability as an answer to the crisis (Varadarajan, 1). Indeed, nationalizing failed banking systems has seen success in the past, notably in Sweden during the early nineties. Sweden’s government did not simply bail out its collapsing banks, but actually became an owner of failed financial institutions. It then resold shares of the banks back to private investors, allowing the government recoup its expenses (Dougherty, 1). This approach was not only effective, but also more fiscally responsible than our current bailout approach; Sweden’s government paid less than two percent of its GDP to get its economy back on its feet (1). It is for this reason that Nouriel Roubini believes that nationalization is the “pragmatic” approach—we would spend less money than we are now, and to greater effect (Varadarajan, 2). Furthermore, there is a question of ethics—is it really responsible and morally correct to continue to bail out the investors who created the mess we are in? If we want to avoid something like this happening again in the future, we need to remove the cushion we are placing under greedy investors. They take dangerous risks in part because they know that their losses will have less effect upon them when the government covers them (3). Nationalizing the banks will make investors accountable for their actions because it will not simply cushion them, but totally diminish the value of their shares. They will be the ones responsible for their actions, instead of the taxpayers. Indeed, it is the taxpayers who have now become the true owners of most of these banks through the massive amounts of money we have been pumping into them. And as Joseph Stiglitz has said, “any system where there is a separation of ownership and control is a recipe for disaster” (Knigge, 1). Nationalizing the banks is the only way that we can recover from this economic crisis, and the only course of action that is fair to our taxpayers. — Ian HartmanDougherty, Carter. “Stopping a Financial Crisis, the Swedish Way.” September 23, 2008., Michael. “Nationalized Banks Are ‘Only Answer’ Economist Stiglitz Says.” February 2, 2009.,,4005355,00.htmlKrugman, Paul. “Banking on the Brink.” February 23, 2009., Tunku. “’Nationalize’ the Banks: Dr. Doom says a takeover and resale is the market-friendly solution.” February 21, 2009.

  13. The economy is struggling right now and some of the major banks are nearly at their end. America is really suffering, so there are many ideas being tossed around to help fix this tough economy, one of which is nationalization. The government has started stepping to try to help the banks, but there still is no improvement. On Friday, after trying to convert $25 billion of the government's preferred stock and $27.5 billion of preferred stock in private hands, CitiGroup’s shares drop down to their lowest level since 1990. The government has now rescued CitiGroup for the third time by taking 36% stake in the company, but so far things are only getting worse. Investors are obviously uncomfortable with the government’s involvement with the banks. The government wants to continue giving CitiGroup support, which is leading to nationalization. The destruction of these huge banks is definitely a scary thought, and it is understandable that the government wants to prevent any more financial chaos, but the government’s involvement may cause problems as well. If these banks are being nationalized, and the stocks are becoming worthless, investors are going to lose interest in investing money at all, scared that even the healthy banks will go under. I think that it is really important to focus on the healthy banks right now. The other zombie banks, like Bank of America, should be left alone to either fix themselves with a little help or go bankrupt. Nationalization only threatens the existence of the healthy banks. Aiding these unhealthy banks is only costing the government and the people money. Instead business and money should go to the healthy banks. Those banks have proven to be smart and careful with their money, so they should in turn be rewarded with the business from the unhealthy banks. -Alexandra FresneCowen, Tyler. "Message to Regulators: Bank Fix Needed Quickly." The New York Times 28 Feb. 2009. 1 Mar. 2009, Martin. "Three Reasons Bank Nationalization Will Keep Investors Awake At Night | Daily Markets." Stock Market, Stock Trading, Forex Trading, Exchange Traded Funds (ETFs) | Daily Markets. 27 Feb. 2009. 28 Feb. 2009, Bradley, and Rebecca Christie. "Citi Gets Third Rescue as U.S. Plans to Raise Stake." Bloomberg 27 Feb. 2009. 28 Feb. 2009, Lisa. "AT A GLANCE: Citigroup To Give 36% Stake To US Government." CNN Money 27 Feb. 2009. 28 Feb. 2009

  14. Given the state of the current economy, it is almost a necessity to nationalize the entire banking system in the United States or at least the banks that are in serious danger. The only other alternative is a government bailout, but "the U.S. government can't afford, fiscally or politically, to bestow huge gifts on bank shareholders" (Krugman). The current market value of Citibank and Bank of America combined is approximately $30 billion, which pales in comparison to the potential hundreds of billions of dollars that the two banks could lose over the next few years (Krugman). Similarly to our situation in the present day, Japan faced a financial crisis in 1990 following the bursting of a bubble. The Japanese government nationalized the bank system (namely the Bank of Japan) and the severity of the financial crisis was limited, although there was still a great toll on the country and it took almost a decade for the country to recover (BIS). Although the concept of nationalization is often associated with communism, communism generally involves a nationalization of all sectors, rather than just the banking/financial sector. Many modern European nations have nationalized banking systems, Sweden in particular. Sweden faced an economic crisis in 1991, the severity of which was lessened due to the government nationalization of Swedish banks. Rather than nationalize the banking sector, "the Treasury Department wanders aimlessly in the twilight zone of denial and delay, postponing the inevitable. That 'inevitable' is the full nationalization of our banking sector" (Kellogg). Taking both Sweden and Japan as examples, the American government ought to nationalize the banking sector rather than try to put it off for as long as possible.- Steve MerbergKrugman, Paul. “Banking on the Brink.” February 22, 2009. for International Settlements. "The Financial Crisis in Japan During the 1990s: how the Bank of Japan responded and the lessons learnt." October 2001., Rob. "Nationalizing the U.S. Banking Sector: There's No Choice." February 13, 2009.

  15. First off, Government’s TARP, or the first bailout plan was to spend $700 billion of tax-payers money to buy up banks’ trouble assets, dispose over time, and resell them. The government did so hoping to fill more capital into banks so that they could start lending which is what banks are supposed to do (BAKER 2008). The plan does not seem to work because no one actually knows how to price the toxic asset and there is uncertainty in return on the investment (Morris, 2009). Banks after receiving the bail out money from government refuse to lend to each other because they are afraid of future losses. While tax-payer’s money is being spent to help inefficient banks, the government’s expectation of banks to create private investment lending fails.In addition to TARP, there is TALF, a program which instead of using tax-payers’ money government print out more money to help financial market dealing with consumer asset-backed security such as auto-loan, student loan, and credit card debt. TALF does not seem to be any successful than the TARP because the focus seems to address only high-security levels and leave out the lower ones which are actually the first ones who were affected by the crisis. Other than that, TALF’s unexpected consequence seems to be elimination of certain types of loans or increases in borrowing rates (Saha-Bubna, Shrivastava, 2009).Since the banking system has become insolvent and banks are just too big to fail, nationalizing bank seems to be the last option. Banks cannot create lending even with government bailout capital; government should take over and regulate the bank. Investment is a crucial sector of Economics activities which requires a functioning banking system. The real problem facing American banking system is that banks have lost too much money; and as a result, private investors are too afraid to put more money into banks’ equity (Ahamed, 2009). Therefore nationalizing the banking system seems to be the last resort even though there is uncertainty that the government will do a better job than the bankers. American’s financial crisis is somewhat similar to those of Sweden’s in 1992 and Japan’s in the 1990’s. Sweden took an aggressive approach in a timely manner to intervene its financial market while Japan took too long to solve the problem. Sweden’s strategy was to make the banks responsible and turned the government into an owner. It forced its banks to write down their losses before coming to the government for recapitalize. Compare to the US’s TARP, which exploited tax payers’ money, the Sweden approach was able to distribute the money for selling toxic asset to its tax payers and government reimbursed more money later when it sold the companies’ shares. (Dougherty, 2008) Ahamed, Liaquat (2009/03/01). The Last and Only Resort. Nationalizing the Bank Problem, Retrieved 03/01/2009, from, Peter (2008/09/30). Labeled as a Bailout, Plan Was Hard to Sell to a Skeptical Public,Nytimes, Retrieved 03/01/2009, from asset relief program&st=cseDOUGHERTY, CARTER (2008/09/22). Stopping a Financial Crisis, the Swedish Way. Nytimes, Retrieved 03/01/2009, from, Aparajita, & Shrivastava, Anusha (2009). TALF Facility's Terms Spur Doubts On Its Potential Impact. Dow Jones Newswires, Retrieved March 1, 2009, from

  16. Nationalization of the banking system will indeed help resuscitate these “zombie banks” but it will come at the cost of the American taxpayers. When a bank is nationalized it means that when its losing money, the taxes of the people have to be put in so that the bank is once again operating in the black. The problem with the financial system right now is set up in such a way that the outcome will be a catch-22 for all taxpayers, no matter if the government nationalizes the banking system or if it come up with a better strategy such as seeking private investors, the end will result in the taxpayers losing money. Although nationalization has worked in the past, Sweden being a prime example as well as nationalizations poster child, there have also been many countries like Zimbabwe that have proved that nationalizing banks can prove disastrous to a countries well being. As I have stated before there are problems with nationalizing the banking system as well as not nationalizing the banks, but I believe that nationalizing the banks is the lesser of two evils. Not only will nationalizing the banks revitalize a failing system but it will also offer better security to the American people. Furthermore if we did not nationalize the banks we would be doing the public a disservice in the long run, because although the banks would be nationalized it would be very minimal government interference, while if we do something else, I believe that in the long run it will hurt us economically.Works Cited Editors, The. "Nationalizing the BAnk Problem." New York Times 22 Jan. 2009. Pender, Kathleen. "What really happens when banks are nationalized." San Francisco Chronicle 1 Mar. 2009. "Taxpayer Beware: Bank Bailout Will Hurt : NPR." NPR : National Public Radio : News & Analysis, World, US, Music & Arts. 01 Mar. 2009.

  17. With the credit crisis reducing many major banks to “zombie” states, it is necessary for the U.S government to take immediate action. Alen Greenspan has been quoted as saying “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” By temporarily nationalizing banks the U.S government could stabilize the economy, and then later sell off the resurrected banks to investors. In determining whether or not to take this course of action, the U.S should look to the examples of Japan and Sweden, two countries that also faced banking crisis. Japan in the early 1990’s tried to support zombie banks as opposed to nationalizing them. As a result the Japanese tax payers suffered heavily from the financial burden of supporting the failing banks, and Japan suffered a decade long depression(Coy). On the contrary, Sweden nationalized banks, fixed balanced sheets, and then auctioned off the good banks(Luce, Guha). In examining both Japan and Sweden, we see the advantage to early decisive action. The American tax payers should not have to support Zombie banks and keep the greedy executives afloat. Instead, the American government needs to intervene with the temporary nationalization of banks. Fortunately, it appears as if President Obama is looking to follow a Swedish model of attacking the crisis as opposed to the Japanese model, as he has been quoted saying “They [the Japanese] never really bit the bullet . . . and so you never got credit flowing the way it should have, and the bad assets in their system just corroded the economy for a long period of time.(Luce, Guha)”Doughtery, Carter. “Stopping a Financial Crisis, The Swedish Way.” World Business. 22 Sept. 2008. The New York Times. 1 Mar. 2009, Edward, and Krishna Guha. “Bank Nationalisation gains ground with Republicans.” Politics and Foreign Policy. 17 Feb. 2009. Financial Times. 1 Mar. 2009, Peter. “Bank nationalization: Who would bear the pain?” BusinessWeek. 25 Feb. 2009. Business Week. 1 Mar. 2009

  18. I’ll be the DA.Collins, argued that “There really isn’t much left to do but to nationalize the banking system, and as a result of that, ‘zombie’ banks will be resuscitated,” and many of you support that argument. I agree that the government needs to act so that the big banks don’t go under, wiping out millions of citizen’s savings. But nationalization is by no means our only, or best, option. We could potentially do nothing at all, but as J. Bradford DeLong of Berkeley Economics says “[To do] nothing was last tried in 1929-1932. The result was called the Great Depression. Let’s not do that again.” Our third option is to have the government infuse money into the banks but leave them independent. Lets discuss the nationalization first. If the assumption that nationalization would resuscitate the banks was sturdy, then maybe it would be the best answer. Once the banks were bought by the government, and divided into good and bad, there is no guarantee that anyone would buy back the good parts. Many of you use the Swedish bank crisis as a proof that nationalization works. This is a comparison between apples and grapes. The Swedish banks were much, much smaller than either CitiBank or Bank of America. Private interests were able to buy up the good assets. With corporations the size of CB and B of A, the private sector will not be able to buy back the banks and they will stay in government hands. Nobody wants the government to permanently own the banks, because then they are either working to make a profit with no independent regulation, or losing money. The purpose of nationalizing the banks would be to save peoples’ savings, but there is no guarantee that it will accomplish this goal. what is certain is that the shareholders in the company will lose their investments, and the people that ran the corporation would lose their livelihood. This obviously doesn’t compare to the savings of the country, but these investments should be taken into consideration before gambling them away with nationalization. Our third, and best, option is to continue with the bail outs. They aren’t perfect, but they allow the corporations to continue supporting the people. Maybe one way to improve the bail out is instead of block funds, the government could buy up some of the bad assets, the way the fed is with their quantitative easing. Consumer confidence is incredibly important, so bail outs are less confidence breaking than a full nationalization. In the end, nationalization of private corporations is by all means bad for the government that has to pay for them, bad for the interests that ran the corporation, and horrible for the stock holders who lose their saving held in that company.

  19. The debate between the advocates of nationalization and those calling for a “wait and see” approach to the financial crisis is a choice of pragmatism over idealism. No one is in favor of a long-term nationalization, one in which banks are permanently and irrevocably turned over to government hands. The action called for would be a swift, temporary reboot of the country’s banking system. Ideally, banks should be controlled privately by highly trained specialists. However, the economic crisis we are now in is a case study in the folly of clinging to ideals in the face of a banking meltdown. Peter Coy remarks: “The U.S. economy continues to spiral downward despite nearly two years’ worth of half-measures aimed at propping up the status quo. Extreme actions are needed to fix the financial system.” Whether or not Citigroup and Bank of America fit Bernanke’s parameters for “zombie banks” does not alter the necessity for action as opposed to incremental nothings or worse, inaction. Why is there such unwarranted political stigma surrounding nationalization? If major banks go under in the future, after waiting for the markets to “correct themselves” and meanwhile losing billions, the FDIC will have to take the reins anyway. Also troublingly stupid is the idea that once nationalized, the socialist seed will be planted and banks will not be returned to the private sector. Perhaps nationalization would seem more radical if history did not provide immediate precedent. Although the Sweden example does not precisely mirror our own crisis, it shows the undeniable necessity of swift, competent action–in comparison to Japan’s “lost decade” of economic shutdown (as a result of propping up zombie banks to investors). Bank bond-holders and shareowners should not be allowed to imitate the Japanese crisis with injections of capital from the government. The financial burden must be taken off the shoulders of hard working taxpayers through nationalization. As Roubini claims: “Nationalization also resolves the too-big-too-fail problem of banks that are systemically important, and that thus need to be rescued by the government at a high cost to taxpayers.” Nationalization has become the only option to the financial meltdown.

  20. During the previous presidential era, the government was not able to correctly identify troubled industries and diagnose them instantly. The public’s fear of a depression has further escalated the crisis. The nationalization of the banking system is a major macroeconomic decision that raises delicate concerns. And the concern is legitimate as this seems to be a major step away from the laissez -fair liberal economic system the country adheres. However, the current financial crisis is a minor pre-text to the magnitude of the disaster that the country will face unless a swift and decisive action is taken. Moreover, the nationalization of the banking system will have definite positive impacts such as re-assuring investors and the public, it will revitalize economic activity.However, it is essential that this nationalization is a temporary major until the banking system is revitalized. A collaboration between investors and the government could is appropriate as this will ensure a survival of the banking system as well as the smooth transition to privatization, once the crisis is over. Moreover the government could sell its shares to the public and recoup the taxpayer’s money, as was the case in Sweden in the early 1990’s. However, if the government barely continues feeding money to the banks it will only go into numerous untraceable holes. Hence as the barrack Obama advised it essential that the countries politicians restrain their ideological differences and concentrate upon the crisis.

  21. America’s banking system is corrupt and needs to be reformed. However, nationalizing will not revive these “zombie banks.” Most of the major issues stem from two key elements: the competition between the private banks and GSEs and the greed of wallstreet. The GSEs were developed to supply liquidity to the housing market. They did this by buying mortgages from the bank. The issue with these institutions is that they have strayed away from their original goals. They increased the number of subprime assests, which originally they avoided. These subprime assets created a vicious cycle. Risky homeowners would be charged a higher interest rate, which would make the companies more money. However, these homeowners eventually were unable to afford paying for the mortgages, thus, they would foreclose. The private banks—who were also buying a lot of subprime assets—furthered this cycle, because it was a quick and easy way to make money. They would bundle these mortgages and sell them, which brought in a large profit. There was a compete lack of government regulation. Instead of nationalizing, the government should continue to buy shares of the banks stock and buy their bad debt so that they will start lending money again. Hopefully, if the banks become profitable again, the value of the shares of bank will go up and then the government will be able to sell those shares. With the profit from these sales of the shares, the government will be able to pay back the taxpayers and not have be in the bank business long term. They then can increase regulation and prevent the greed that is currently so prevalent in wallstreet.-Hattie YoungRamage, Stephanie. “Nationalizing U.S. banks and the truth about Sweden.” Sunday Paper. 1 Mar. 2009 Nationalizing U.S. banks and the truth about Sweden.”Fannie and Freddie and the market chaos | End of illusions | The Economist.” 01 Mar. 2009”Obama vows to lead economic revival despite crisis —” Long Island and New York City news from – A Long Island Newspaper — 01 Mar. 2009,0,1631216.story.

  22. As much as I am against the idea of socialism, I feel that nationalizing our banks could be the only viable solution for saving our troubled banking system. Senator Chuck Schumer of New York feels that “zombie banks” should be taken over by the government, regardless of size. Schumer would then “clean-up” or essentially liquidate the banks and sell them back into the private market. (1) I think that this plan could go a long way to revive Americans’ confidence in the banking system. In any event, something more must be done to dig us out of this hole. The Troubled asset relief program (TARP) has already been implemented, but doesn’t seem to be achieving its goal of restoring stability to the U.S. financial system. (2)Sweden and Japan have already nationalized their banks with great success. I believe that we can resolve the situation over time if we follow the example of the Japanese and Swedes. (3)1. Barach

  23. Nationalization will definitely give zombie banks a chance to gain new life. Without nationalization, there is no way that these banks will survive. However, if nationalization is not effective in resuscitating these banks, the economy and government will be worse off than before. The uncertainty of whether or not nationalization would help leads me to believe that the attempt to save these zombie banks is not worth the risk. Therefore, the question seems to be moot. By definition it seems that zombie banks cannot function without an implicit or explicit government guarantee. Zombie banks cannot exist without it.The TARP plan seems like an easy and efficient way of turning toxic assets into liquid capital. Instead of just giving banks capital for nothing, the government is killing two birds with one stone. Hopefully these assets will appreciate and eventually the government can make a decent return on the investment. However, the TARP says something about the banks that are receiving it. As we move closer to nationalization, it makes sense that these TARP banks be the first to go, marking them with a huge red flag. This red flag scares off investors, making the little capital they have gained from the bailout packages meaningless as that is all they will receive from anybody. Without investors or capital from any other source but the government, these banks, with or without tarp, would fail anyway.The Japanese crisis and their handling of it has many lessons for the US to take note of. However, these lessons must be taken with warning. There has been no banking crisis like the one we are in currently. The interconnectedness of every bank in the world to this crisis is unprecedented. Personally, i feel that looking at other crises will only lead the economy astray. Economists and policy makers must make decisions based on the current crisis, not solely based on other crises. But the greatest lesson that the Government should take from the Japanese crisis is transparency. In order to boost confidence in the system, the Fed must be as transparent with their actions as possible. There is no amount of bailout money that can replace the value of confidence in the market.

  24. Right now, with the current economic stimulus package requiring the government to buy up shares of failing banks, the nation is “straddling the line” that would lead to complete nationalization of the banking system. Recently, Bernanke attempted to ease fears that Nationalization is occurring. He doesn’t believe any major banks are on the verge of failure, however, he alluded to the fact that these institutions may end up in government hands. However, the government is not purchasing common stock and therefore does not have a say in the way the company runs. Bernanke said that the Fed did not need to institute majority ownership of banks. (1) While the government may need to continue to straddle this line for a while longer to keep trust in the banking system and to keep some of these banks for imploding, it is important that they maintain their distance and let the banks figure out their problems on their own, that way they are more likely to be fixed and not impact other banks through lending. If the banks were allowed to continue at their current rate, some of them would most likely fail. Which at this point could prove detrimental to the baking system. Which is why the bank must tread carefully and help the banks while not completely taking them over and allowing them to fix their own problems. The TALF program that the Obama administration is considering would lend up to $200 billion dollars in securities backed by things such as student loans or credit card debt. The administration is hoping that this would free up funds to help get rid of the tremendous debt caused by the mortgage crisis. (2)When Sweden was going through a similar problem in 1992, the government held banks responsible for the debt that they accumulated. They “extracted pounds of flesh” from shareholders before allowing them to write bad checks and they were also forced to report all of their losses to the government. (3)Sources:1. Reddy, Sudeep. “Bernanke Eases Bank-Nationalization Fear.” Wall Street Journal 26 Feb. 2009. 1 Mar. 2009 Solomon, Deborah. “Bailout Talks Turn to More Equity Stakes.” Wall Street Journal 6 Feb. 2009. 1 Mar. 2009 Doughtry, Carter. “Stopping a Financial Crisis, the Swedish Way.” New York Time 22 Sept. 2008. 1 Mar. 2009–Joanne Schwartzberg

  25. As the credit crisis continues to worsen, the government struggles to decide what will be the most beneficial way to solve this situation. Do we let the current crisis run its course to see if it will solve itself or do we let the government intervene and have complete control of spending and essentially where tax payers’ money goes? As we have seen this is difficult, because who is to say that the government will have better control? We have seen the government spend hundreds of millions of dollars on things that are not at all important to the wellbeing of its people, but rather what is best for them. More recently we have been exposed to the idea of partial nationalization of banks, meaning that the government would only take control of certain banks and then let others continue to run on their own. Deputy Director of the Peterson Institute for International Economics, Adam Posen states: “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s” (Sanger, 1). Even with partial nationalization, the government has enough say in how things will be run, that it overlooks the people’s wants and needs. Sanger predicts that this will eventually lead to investors fleeing from banks because they will fear the government taking over their banks as well. So in retrospect, partial nationalization will down the road lead to complete nationalization of all of the major banks. We might as well let the banks run themselves and see if they can save themselves before letting the government intervene, in which we have no idea what is capable of happening. Sources:1) Andrews, Edmund L. “As Doubts Grow, U.S. Will Judge Banks’ Stability.” The New York Times 1 Oct. 2008. 1 Mar. 2009 Sanger, David E. "Nationalization Gets a New, Serious Look." The New York Times 25 Jan. 2009. 1 Mar. 2009

  26. Nationalization of banks seems to be “…necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring…” according to Alan Greenspan. The banks are in serious trouble and people don’t want to take out loans from them because they know this. This bailout for the banks may be the only way to to get people to trust them again. This is a good thing but there could be problems in the future because this nationalization is supposed to be temporary. I’m not sure I agree with this. Is the Government ready to take on the power, troubles and responsibilities of the banks and then just give it back? Top advisors to president Obama, such as Timothy F. Geithner, is also unsure if this is the right course of action. John Lott author of “Freedomnomics” also feels uncomfortable with the government in control of all our assets. There have been other bailout plans, such as the “bank holiday”, and it has been decided that nationalization is better than the other options (as implied by Bernanke and Paulson). Though I believe that it is risky for the government to be given control of banks, I also believe this is the best course of action. The government cannot stand idly by and allow the banks position to get gradually worse. In order to try and keep people from freakin’ out about the word nationalize, new acrynoms have been made to replace it. “While the Obama Administration has given some signals that it is not rushing to Nationalize the Big Banks, there are also other signals that Nationalization, if done under a more palatable name, might happen to prevent the zombie-ization of those banks, which are Too Big to Fail, but Too Dead to Survive, either, to stop their constant need for more and more Federal funds – AIG, while not a bank, is back asking Congress for more right now. We hear talk of “Pre-Privatization,” and other fanciful names to help us swallow and properly digest this inflammatory concept.” (A Rose by Any Other by David S. White) These acronyms can and help and seem to to help make nationalization more accepted, I think that it is working if even just slightly. Sweden’s had a similar problem in the 90’s in which their government gave them money as well but they had to keep a journal of their losses in order to know the risks they were taking. The problem with this is that the responsibilities that the banks messed up on could end up being messed up on once again. They need to be regulated so that they actually learn from their mistakes this time .No matter what the economy must be stabilized and like Alan Greenspan I believe that that won’t happen without this bailout. By,Xavier Richards,2933,494505,00.html

  27. According to a Mr. Henry Blodget, people are misunderstanding the phrase “nationalizing banks.” He states, that “it does not mean “government-run banks” but rather “It means temporary seizure and restructuring.” He references Krugman, who believes banks should be nationalized now, and who brings up many reasons why. Krugman states that some major banks are very close to failing, that after the Lehman Brother situation, which left the financial system almost destroyed, banks must be rescued, and that bank shareholders cannot receive huge gifts from the US government because they cannot afford to after the banks have been rescued.Here is the article I found this information from:

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