Monday, February 23, 2009

The Problem With 'Nationalization'

A former vice president at both the Federal Reserve Bank of Dallas and Citigroup, economist Gerald O'Driscoll puts together at WSJ a blow by blow of what is wrong with "nationalization", and government involvement in banking, here.

His conclusion:

Mr. Geithner wants a public-private partnership to buy toxic assets from banks. All that government has done thus far has only scared private money off. As bankers now realize, when you turn to the government for financial assistance you take on an untrustworthy partner. Outside money will not come in only to see its investment diluted later on when the government injects additional funds.

Rather than focusing on ways in which we can further involve the government in the financial system, we need to find ways to extricate banks from government's deadly embrace. Banks, at least the behemoths, were public-private partnerships before the crisis. Deposit insurance, access to the Fed's lending, and the implicit (now explicit) government guarantee for banks "too big to fail" all constituted a system of financial corporatism. It must be ended not extended.

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