Nationalizing the banks

What a difference a year makes.

A year ago anybody who proposed nationalizing the banks in Canada, the United States or the U.K. would probably have been dismissed as a looney lefty.  Now widescale nationalization of major banks is being raised as a serious alternative in leading articles in the Economist and the New York Times.  An on-line debate of four experts in the New York Times on the issue had three reluctantly in favour and one avoiding the question.

Of course, we’ve already some nationalizations of banks as a result of this financial crisis in the U.K. and Iceland and previously in Swedish, as well as the US government becoming the largest shareholder in CitiGroup and Bank of America and the UK government the biggest shareholder at the Royal Bank of Scotland.  Now nationalization is being seen as the perhaps the only or best solution to dealing with the toxic assets and solvency problems that continue to cause a severe credit crunch.  The other alternatives–creation of a “bad bank” to take over the toxic assets and/or backstopping banks with insurance and guarantees-have problems and could lead to effective nationalization in any case.

In Canada, we don’t seem to have large banks on the brink of collapse (at least yet), but there are major problems with liquidity and access to credit.  They’ve been raised as the number one priority by business groups including the Canadian Manufacturers and Exporters and the Canadian Chamber of Commerce and so they are sure to figure heavily in the budget tomorrow.     Increased lending through federal government lending institutions such as the BDC, the EDC, FCC, the CMHC and through other funds are no brainers with some measures already announced.  Bigger questions are what else will be done in terms of guarantees, insurance, regulatory changes, and/or further swapping debt with banks and other lending institutions.  

Given the state of finance some of this is, especially the lending, is necessary and positive.  But what sort of conditions will be applied, how much of this will end up being a bail-out of bad assets with limited upside or control, and how will it change the state of financial industry?   Poor regulation and excessive growth of the financial industry was a major cause of this financial crisis in Canada as well as elsewhere.  Unless these short-term measures are part of a plan for much stronger control and regulation of the broader financial industry, it will fuel yet another boom and bust cycle in a few years.