Take the Nationalization Express

David Weigel | October 10, 2008

For your daily dose of terror, go to Albert Bozzo at CNBC.com.

"I don't wish to spread alarm on the line people but the big issue confronting the market is I'm afraid the health and sustainability of Morgan Stanley and Goldman Sachs." Hugh Hendry, Partner and CIO at Eclectica, told CNBC early Friday. "It is unimaginable that they can be allowed to go, I suspect that they will be nationalized at some point today or over the weekend," he added.

Just one guy's opinion, but it's not impossible.

The Emergency Economic Stabilization Act of 2008’s vague language gives Paulson almost unlimited power to intervene and leaves much up to interpretation.

In that context, some say cash injections could apply to non-depository institutuons like investment banks, insurers and hedge funds.

“He’s free to just strike deals, to do special deals,” says Lawrence White, a former White House economist and savings and loan regulator, who adds Congress was aware of the powers being given to Paulson and thus pressed hard for an oversight board.

This weekend will be key. The New York Times previews some of the discussions between the U.S. and the European powers. No one is ruling out the "special deals" that would let the Treasury take over banks. 

Comments

JD|10.10.08 @ 4:24PM|#

Goldman Sachs and Morgan Stanley are now bank holding companies, so Paulson would certainly have the power to buy an equity stake. I would think that it's highly unlikely that Goldman and Morgan would welcome such an investment, barring imminent bankruptcy.

Paul|10.10.08 @ 4:25PM|#

The Emergency Economic Stabilization Act of 2008's

American Structured Securities Rescue Act for a Prudent Economy.

Geez.

|10.10.08 @ 4:25PM|#

and all you fuckin right wing nutjobs were sayin Obama was the socialist. hehehe

|10.10.08 @ 4:26PM|#

Paul, dammit man. Thats most excellant.

Michael Ejercito|10.10.08 @ 4:35PM|#

Can anyone explain the problem with allowing banks to lose money?

Paul|10.10.08 @ 4:39PM|#

Can anyone explain the problem with allowing banks to lose money?

You bet.

Ok, it's like this. You see, when a bank loses money, it has less money than it did before it lost it. Ok, so like, when banks don't have as much money, money becomes... harder to come by for the bank. And when money is hard to come by, fewer people have it.

Think of it like this. You have some money, you make some bad investment decisions, then you don't have so much money anymore.

Having less money is worse than having more money. And when people have less money, things are worse...than when they had more money. And everyone needs more money.

Ok, it's like this. Answer this question:

Would you rather have more money than less money?

A) More money
B) Less money

If you circled A, then you favor a bailout.

guy in the back row|10.10.08 @ 4:41PM|#

OK, I know nothing about finance, but if the federal government owns all the banks, the feds can then OK who gets a loan, so can they then decide which types of businesses or groups of people have more advantageous interest rates?

I hear from a lot of people that a bunch of dead white slaveholers know nothing about the modern world. Did they know anything about interest rates and economic bubbles? Is this all constitutional? Will Bush have to double the size of the Supreme Court to keep this from being struck down?

ed|10.10.08 @ 4:43PM|#

I have a plan. A bold plan. The Government™ seizes all property and assets in the U.S., divides it equally among all 300 million citizens (sorry, no illegals) and says, "You're on your own. Good luck." Is it crazy, or just crazy enough to work?
I'm calling the Economy Czar. What's his name...Pat Paulson?

Paul|10.10.08 @ 4:59PM|#

ed-- i'm all for it providing they don't divide the debt up, too.

|10.10.08 @ 5:05PM|#

This is a crisis of confidence, and its getting so bad because a LOT of people have the (correct?) intuition that their leading financial institutions are corrupt gamblers who were running a ponzi scheme based on some mysterious entity called "derivatives". Since they are now exposed as being incompetent, crooked and short sighted, confidence has evaporated. Without confidence, what good are they? In such times, one can imagine the president taking the lead and "reestablishing confidence" by showing that EVERYTHING is not some kind of ponzi scheme and there IS a real economy and it runs on credit and its okay to have capitalism that works. But we have a chimp as president and ...the rest will be history. Still, its going to be worst out in the outer provinces of the empire, this country will survive. Should I add "inshallah"?

Kolohe|10.10.08 @ 5:08PM|#

Should I be concerned that Paulson looks a little like the guy on page 10?

|10.10.08 @ 5:11PM|#

doom
Doom
DOOOM!

Beat ya, Warren.

|10.10.08 @ 5:18PM|#

OK, I know nothing about finance, but if the federal government owns all the banks, the feds can then OK who gets a loan, so can they then decide which types of businesses or groups of people have more advantageous interest rates?

So you see why all the activity in Washington is to advance this goal, yes?

Will Bush have to double the size of the Supreme Court to keep this from being struck down?

Nah. Under current readings, the nationalization of the entire economy would be within the Interstate Commerce Clause.

|10.10.08 @ 5:50PM|#

Can anyone explain the problem with allowing banks to lose money?

If banks lose (really not all that much) money, then they go bankrupt (banks invented the term "bankrupt"!). That means your checking account, savings account, CDs, etc. become the responsibility of the FDIC. The FDIC, like most government insurance schemes (Social Security, Medicare, FEMA insurance, etc.), doesn't have enough money to cover a real disaster where more than a very small number of banks fail. Messrs. Paulson and Bernanke--as you may have heard--think there's a real disaster on their hands.

Now--apart from how inconvenient the transformation of all of your non-mattress-stored liquidity into an asset as secure as a mortgage-backed security might be to you personally--if your bank account disappears because the FDIC is out of money, that counts as monetary deflation! Dominant monetary theory considers serious deflation to be the first horse of the Apocalypse (see Bernanke on the Great Depression). Sure, dominant monetary theory may be wrong, but that won't stop Paulson and Bernanke from trying to do something.

|10.10.08 @ 5:51PM|#

Nah. Under current readings, the nationalization of the entire economy would be within the Interstate Commerce Clause.

Either that or by using the other fashionable dodge :

"Promote the general welfare"

Heck I am surprised that Bush and Co. didn't take a page out of the progressive playbook and even claim that Caribbean vacations for their favorite Islamists were allowed by at least one of these two quotes, maybe both.

|10.10.08 @ 6:02PM|#

seriously though, throwing around phrases like "nationalise the banks" and not getting villified is the most glaring symbol of the demise of the republican party. this could, however, be the start of something big for the libertarian party! If the republicans continue this way, they will become a worse big government party than the democrats (the reps just happen to also want to control what people do in the privacy fo their own home.) they will have 30% of the populace, the dems (after 8 years of obama and dem controlled congress) will have about 40%. the remaining 30% of the people will start clamoring for a party that truly represents those that understand the need for a small and as unobtrusive as possible government i.e. the libertarian party.

|10.10.08 @ 6:24PM|#

swede | October 10, 2008, 6:02pm

While happily digging through a pile of manure,

There's got to a pony in here somewhere.

|10.10.08 @ 6:33PM|#

Just thinking long term, J Sub D. Silver linings are important, you know.

Czar|10.10.08 @ 7:16PM|#

I don't know what everyone's so worried about. Total collapse of our current financial and social orders is a good thing. It's the only way we'll ever have a chance at instituting new ones.

Anonymous|10.10.08 @ 8:11PM|#

brotherben, he is. But ganster socialism is far better than liberal socialism.

|10.10.08 @ 8:56PM|#

OK, can we all agree that evangelicals should be kept as far from political power as klansmen now?

Benedict XVI|10.11.08 @ 5:59PM|#

Hail Market,
Full of grace,
Prosperity is with thee.
Blessed art thou among systems,
and blessed is the fruit
of thy womb, Capital.
Holy Market,
Mother of Goods,
pray for us consumers now,
and at the hour of our bankruptcy.
Amen.