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.

The Curious Beliefs On Current Monetary Policy: A Depression Warning

As we pointed out below, Fed chairman Bernanke believes the Fed is currently conducting an easy money policy.This despite the fact that as recently as Mar.2008 three month annualized money growth (M2) was climbing at annualized rate of 12.6%, but has since collapsed to the point where as of Aug. 21 three month annualized money growth (M2) is increasing at only a 2.5% annualized rate.

This is simply a remarkable drop in money growth that will lead to a depression, if not reversed.

It can be argued that a halt to money growth pyrotechnics is a good thing, and we would concur that the end to money supply manipulations by the central bank can be a positive if it is adopted as a long term attempt at stable monetary policy. However, the clueless nature of the current slowdown in money growth could lead to a depression whereby radical government policies are adopted to "cure" the recession. Such new polices are apt to further stifle the economy and prolong any downturn by years.

Thus, Bernanke's misunderstanding of current money supply policy is shocking. More shocking is that many other economists, if not most, hold this inaccurate belief. In today's WSJ, economist Gerald O'Driscoll warns of potential inflation and writes that "Now Fed Chairman Ben Bernanke has decided to try to... spend the Fed's reputational capital on an easy credit policy."

They hold this inaccurate belief because interest rates are low. Generally, such low rates would result in huge money increases. However, if real interest rates are lower than fed fund rates, which appears to be the current case for no-risk government securities, money growth will not occur.

If this policy is not soon reversed, we repeat, we are headed for a depression. It will make the current housing crisis look like boom times.

O'Driscoll: The Fed and Treasury Are Wrong On Freddie and Fannie

Gerald O'Driscoll has a well reasoned Op-Ed at WSJ outlining a solution to the Fredie Mac/Fannie Mae crisis, here.

His conclusion:

[T]he prevailing wisdom at the Treasury and the Fed..is to encourage ever larger institutions, too big to fail, which can be then placed under Fed ministrations. Let us not resolve one crisis by sowing the seeds of the next. We need to empower markets, not embolden central bankers.