Former Fed Chairman and longtime free-market icon Alan Greenspan now says nationalization of U.S. banks might be the “least bad” way forward in the ongoing financial system collapse.
In making the comment, Greenspan joined Republican Senator Lindsay Graham (R-SC), a member of the Senate Banking Committee, in testing the waters for support of the idea of letting government simply take over failing banks. Germany also this week cleared the way for bank nationalization as a last resort.
“It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring,” Greenspan told the Financial Times in an interview.
“I understand that once in a hundred years this is what you do.”
Greenspan made the comments before speaking to the Economic Club of New York this week.
“In some cases, the least bad solution is for the government to take temporary control” of banks via the FDIC or some other mechanism. Many observers have suggested a return of the Resolution Trust Corporation, an entity created to unwind the savings-and-loan crisis of the 1980s.
Such a strategy would “allow the government to transfer toxic assets to a bad bank without the problem of how to price them,” Greenspan told the FT, although he warned against forcing losses on senior creditors in any case.
“This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”
NYU economist Nouriel Roubini, in a column, pointed out that he predicted a year ago that bank losses would hit at least $1 trillion and possibly $2 trillion.
“At that time, the consensus among economists and policymakers was that these estimates were exaggerated, because it was believed that subprime mortgage losses totaled only about $200 billion,” Roubini wrote in the Business Standard.
It’s going to end up even worse, Roubini now says.
Before, he was counting primarily failed subprime mortgages. Now, thanks to the global recession, you have to lump in prime mortgages, credit card debt, auto and student loans, and a bevy of industrial loans and sovereign bonds suddenly at risk.
“If you think that the $2 trillion figure is already huge, the latest estimates by my research consultancy RGE Monitor suggest that total losses on loans made by U.S. financial firms and the fall in the market value of the assets they hold (things like mortgage-backed securities) will peak at about $3.6 trillion,” Roubini wrote.
U.S. banks and broker dealers are exposed to about half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the United States and abroad.
Meanwhile, he says, the capital backing the banks’ assets was only $1.4 trillion last fall, leaving the U.S. banking system some $400 billion in the hole, or close to zero, even after the government and private-sector recapitalization of such banks.
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