“Nationalizing” Banks

"Sticks and stones may break my bones, but words will never hurt me."

Not so when the word is nationalization. That word appears to have trimmed a few more percentage points off the stock averages in the past few days.

The remarkable thing is that people seem to have no idea what nationalizing means, much less agree on its meaning. After listening carefully, I've decided that it has no special new meaning or relevance, but that the word itself is toxic.

In modern banking history, a failed or insolvent bank is taken over by its insurer, the FDIC, while a private sector purchaser is sought. Or, probably more likely these days, the FDIC finds a buyer prior to closing the bank along with the bank's primary regulator. In the first instance, one can say that the bank is temporarily nationalized-taken over by a government agency. Under the doctrine of "early intervention" or "prompt corrective action," the FDIC may find a buyer or it may "nationalize" the bank before it runs out of capital, i.e., while it is still solvent but expected to be insolvent before long.

My point is not whether the word "nationalization" fits or doesn't fit the circumstances; my point is simply that people are just using a new word (in this context) for a familiar action. The word frightens because it is usually associated with socialism, but it's just a new label for old wine.

If a couple or more of very large banks run out of capital at about the same time, whether in reality, or as a result of mark-to-market accounting, it would probably take a while for the FDIC to "resolve" them.  During that period, the banks would probably be under the FDIC's (the government's) jurisdiction. One could call that nationalization, but it's never been called that before, and calling it such now is doing real damage. Now is a time for watching our words and showing some restraint.

Comments (2)

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  1. John Booke says:

    Bob the problem I have with this is that these “very large banks” have morphed into something very different than what the FDIC was designed to regulate. Most of the “capital” in these “banks” is worthless IOUs on risky bets. In effect these banks have clubbed together to play a risky game where they insure each other against their own unrealistic speculative bets. Shamefully, our government coninutes to allow the behavior and continues to stick taxpayers with the losses.

  2. “One could call that nationalization, but it’s never been called that before, and calling it such now is doing real damage. Now is a time for watching our words and showing some restraint.”

    I agree with you that it’s nothing new, but I insist on calling it nationalization, precisely because it’s terrifying everyone. That’s how moral hazard works. Fear. I don’t want anything happening like this again. Apparently calling banks “Too Big To Fail” doesn’t scare anybody.

    We have a welfare state. Since I don’t know what Socialism is any more for many people, I’ll just say that I have seen reports that even in Eastern Europe, with its problems, most people believe that our free market/government systems are going to remain in some form. My fear is nationalism, not socialism.

    Also, if precision of speech is important, I wouldn’t go around calling what we have a free market, but that’s just me.