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Obama's team mulls nationalization of banks

US banks nationalizationNationalization induces banks to conduct the most reckless policies, with the expectation of a worst-case scenario bailout. By greatly changing the market expectations, nationalization tremendously distorts market mechanisms and allocations. Basically, any bank would be inclined to offer its customers the highest rate and make riskier investments instead of normal market activities; nationalization encourages reckless speculation and siphons funds from productive investments. Also, nationalization encourages bank monopoly as small banks, considered non-essential, are allowed to fail, while entities “too big to fail” are assured of government support. Bank nationalization offers the government tremendous control over economy and investment allocations: essentially, the biggest investments come under state authority. As government entities are generally less efficient than privately owned ones, the nationalized banks’ investments would be even more wasteful than before. Nationalization ignores a paramount question of social justice when taxpayers pay for the speculators’ fraudulent policies. Before contemplating nationalization, the state prosecution should reclaim the profits that led to the banks’ collapse.

Partial nationalization is worse than full nationalization, as it offers the owners of failed banks the best of two worlds: government financing and retention of effective control. Often the same people who led the bank to failure – or similar people who led another bank – continue as its top managers, with eight-figure salaries paid by taxpayers. If a bank cannot refinance its bad debt from private source, it fails – and when it fails it fails; no question of retaining private ownership. Instead, taxpayers have only received 6% on Bank of America in return for a full-blown bailout.

Allowing the banks to fail would have a tremendous positive effect on the markets: after seventy years of government-sanctioned negligence, investors and depositors will have to observe due diligence and avoid speculative banks in the future. The refusal to nationalize banks will sanitize the economy: today, speculative and honestly conservative banks compete for customer deposits and investments on equal terms, and conservative banks have to embrace speculative policies in order to attract deposits with promises of high payoffs. Failures of speculative banks, with concomitant losses to depositors would reestablish bank diversification, allowing risk-averse customers to have the option of risk-averse banks.

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