Eli Lehrer: "The U.S. government has no business taking over banks."

Eli Lehrer: "The U.S. government has no business taking over banks."

Debate in the Business Week Debate Room
February 04, 2009

Nationalize U.S. Banks: In light of the financial crisis, the U.S. should nationalize banks, taking over the most troubled ones.

Pro: The Surest Way to Recover

by Thomas S. Mondschean, DePaul University

When a bank fails, the FDIC
has three options: closure and liquidation, merger with a healthy bank,
or nationalization. Most failures are resolved using the merger option,
but for very large banks, nationalization for a temporary period may be
the best choice for taxpayers.

In 1984, Continental Illinois Bank, then the seventh-largest bank in the U.S., failed. The FDIC
decided to nationalize it. It wiped out existing shareholders, infused
capital, took over bad assets, replaced senior management, and owned
the bank for about a decade. The management ran the bank like a
commercial enterprise, not a government agency. In 1994, it was sold to
a bank that is now part of Bank of America (BAC).

Nationalization
does not mean socialization. It means the government will manage the
bank as a commercial entity, with the intention of selling it back into
the private sector. This approach means that the deposit insurance fund
and taxpayers gain protection from the hazard of poorly capitalized
institutions’ taking excessive risk with guaranteed deposits in a
gamble for resurrection.

If nationalization is done carefully and for a temporary period, it can prove useful for contending with large bank failures.

Con: An Unneeded Complication

by Eli Lehrer, Competitive Enterprise Institute

The
U.S. government has no business taking over banks. Outright
nationalization of banks would lead to poorly run banks and, in the
long run, make America poorer.

As a trip to any Motor
Vehicles Dept. can illustrate, the government doesn’t always do a great
job running things. Even when they provide decent service, in fact,
government-run “businesses” like the Postal Service and Amtrak almost
always lose money. Government-run banks would almost certainly lose
even more. And, when they lose money, taxpayers would end up with the
bill.

Long-term government bank ownership, in any case,
would simply make the country poorer. Banks actually create money when
they lend it out, but doing so only has positive overall economic
consequences when the loans get repaid. Government-owned banks would
face enormous, understandable pressure to lend to politically powerful
groups and industries that can’t reasonably repay their loans. Even the
best managers couldn’t overcome this pressure.

The
government has a role in making sure that banks operate in an honest
and forthright manner. But it shouldn’t try to run banks.