Krugman echoes in favor of nationalization
Posted by Dave Bath on 2009-02-03
Paul Krugman, the 2008 Economics Nobel Laureate, has an opinion piece in the The Age that isn’t too far off my own piece "Catchcries" (2009-01-24), arguing "No capitalization without representation and returns".
If there is a failing in Krugman’s piece, it is that he limits his discussion to the finance sector, rather than applying the same logic to other sectors (e.g. the car industry).
Until Krugman’s piece, I’ve felt like a lone voice in the Australian wilderness. Opinion pieces in Oz have either argued that capitalism should be dumped, the "moral hazard" of the bailouts, or for specific tweaks to the administration of bailouts.
"Taxpayers should not be bailing out the bunglers" (2009-02-02) points out the hypocrisy of companies asking for cash from the government but not giving them the same rights they would give in return to private investors, or, looking at it the other way, the stupidity of governments for throwing money at companies without demanding the same rights private investors would receive for the same cash.
You might think, then, that if banks currently can’t or won’t raise enough capital from private investors, the Government should do what a private investor would: provide capital in return for partial ownership.
But bank stocks are worth so little these days – Citigroup and Bank of America have a combined market value of only $US52 billion – that the ownership wouldn’t be partial." Pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.
My response to this prospect is: So?" If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama Administration appears to be tying itself in knots to avoid this outcome.
In other words, governments, both US and Australian, have enough (misplaced) confidence in capitalism to try and rescue it, but don’t hold to capitalism’s basic rule for success… "Buy low, sell high", or they have no confidence in the result of the rescue attempt… that share prices will rise again.
Besides, if there is a rise in share prices from the current position, it’s a fantastic investment opportunity. As I wrote elsewhere (here) doing a table-napkin calculation:
- Prices of stocks have dropped around 50%
- Expect prices to normalize in 2 or 3 years
- That gives a double-your-money in 2 or 3 years return… pretty damn good!
Even over five years, the return is pretty darn good in straight cash terms, let alone the benefits to society from the stability this would create.
The big question is why is the Obama administration (and KRudd’s too) going to all the effort of "tying itself in knots", imposing a significant amount of bureaucratic machinery and political odium if the administration of policy is wrong? There must be a reason why the simpler course isn’t taken.
Even if we use the dictum "choose incompetence over corruption as the reason", then the government is to blame: incompetence is as bad as corruption.
I’ve pushed the nationalization barrow before, both from the perspective of equity for cash being consistent with standard business rules, and from the point of view of improving the policy levers available to government:
- "Catchcries" (2009-01-24) argues we should buy back the farm by requiring equity for capitalization.
- "Buggered: no wonder how, now wonder who" (2009-01-20) points out that we have not knelt down for Big Finance, but bent over. It’s time to be more dominant over those sectors.
- "Oz climate policy levels Jeffed by state premiers" (2008-12-21) points out how the ability to implement policy was castrated by privatizing utilities.
- "Rightsizing is better than recession" (2008-11-30) talks of a corollary of increased nationalization, the policies allow us as a nation to escape the rat race, take a "Sea Change"
- "Sarkozy’s smart move" (2008-11-09) shows that governments "buying into" essential sectors is an approach recognized by at least one national leader, although he is considered unorthodox by many.
- "Economist destruction is terrorism" (2008-11-03) cites Oz Attorney-General website documents arguing that economic damage is a type of terrorism… yet we support those terrorists rather than sieze assets like we would for other criminals who cause far less misery!
- "Nationalized banks = Lower interest rates" (2008-07-29) reviews Harvard Business School research
- "The Economist wants to nationalize a bank: what the…" (2007-11-27) argues for simple equity.
The analysis points out that the state is throwing cash at the bank to cover liabilities, but has no control over risks, then points out what private enterprise would do in this situation:
Were the government a distressed-debt hedge fund, it would be trying to assume control, squeeze out existing shareholders and get back the money it is owed.
- "Environment and Nationalization" (2007-05-30) talks of the necessity of nationalization to force and manage decreasing "sales" for utilities.
- By the way, I’d argue for equity in housing in return for largesse. Again, buy-low, sell-dear when markets are resurrected.
I don’t know if any other Oz bloggers have been pushing the same equity-for-capitalization barrow. If you do, please note them in a comment so my readers can see the stupidity of our governments for not even publically considering such an approach.