Banking Nationalization VS. "Good bank, Bad bank"

Banking Nationalization is becoming a very big possibility in the US, through the government bailing out the big banks and taking in large stakes of ownership in these banks. Nationalization refers to a government that acquires a majority interest or full interest in a bank. The government, being the largest shareholder, would make all the decisions such as replacing the management team and wiping out the existing shareholders. Then, once the bank has fully recovered, the healthy bank is sold back to private investors and the bank could continue as a healthy, private bank. Bank nationalization had been practiced by several countries and the best known example of this is when Sweden nationalized their banks in the 90's and successfully recovered their banking system. Even though banking nationalization has been proved to work by countries such as Sweden, the US is a firm non-believer in banking nationalization. This was shown when US top economic advisers, recommended that Japan should not have nationalized their banking system during the Japanese economic depression in the 90's. The US is now however facing similar challenges to Japan and they are currently doing the exact opposite as they advocated almost two decades ago.

As many US economists and politicians oppose the proposed solution of a nationalized banking system, someone needs to come up with an appropriate alternative. On proposed solution is the "Good bank, Bad bank" strategy. This kind of plan would split an institution (bank) into two parts: First is the "Good bank", which will receives all the good assets and some of the firms remaining capital. This well then be a healthy institution and continue to be a productive private company. The "Bad bank", will receive all the bad assets and the remaining capital of the firm. Even though there will not be enough capital to cover these bad assets, new capital would likely come from taxpayers money.

Now you would think that whether we as the taxpayer pay for a nationalized banking system, or whether we are paying to adopt this "good bank, bad bank approach. Why would it matter which strategy we choose. Common sense tells us that we should go with the nationalized banking approach, since at has been proven to work in the case of Sweden. But, Alan Blinder who is a economics professor at Princeton and also the former vice chairman of the Federal Reserve thinks otherwise. He states in a NY Times article that there are several reasons why a national banking system would not work. Firstly, Blinder describes a "domino effect" where he says that if the government takes control over a few banks, the rest of the banks would soon not be able to compete with the government owned banks and would soon default, thus causing a domino effect. Secondly, the US government would have a near impossible task to be able to manage thousands of banks that make up the world's largest economy. The swedes were successful, since they only had a handful of banks to manage. The third and most important factor, is that of a political stance. Since bank nationalization could almost be considered as a taboo subject in the minds of many Americans, politicians will have plenty of obstacles to overcome the American disbelief in nationalization.

So looking at all the obstacles that lie ahead of initializing a national banking system, I would prefer to see a different strategy put in place, such as the "good bank, bad bank" strategy. Bank nationalization may have worked successfully in other countries, but I believe that in the democratic system that we live, no policy will survive that most Americans do not believe in and also at this scale would the US government really have the man power and skills to pull off such a daunting task?

http://www.nytimes.com/2009/01/26/business/economy/26banks.html

http://www.nytimes.com/2009/01/16/business/16banking.html