Idiotic Flap over "Nationalization"

Sitting in Canada, it is humourous to watch all the yap-yap going on in the US over "nationalizing" the banks.

First, this is obviously a maneuver created by the right to stop something it doesn't like.

Second, under FDIC rules failed banks are "nationalized", i.e. the bank is seized and sold (if possible) otherwise their assets sold off. But somehow the large banks have mesmerized the US government into thinking that FDIC rules don't apply to them.

Third, despite all this yap-yap, the real nationalization has already started and nobody noticed! Here is Paul Krugman pointing out that the emperor has no clothes:

All your downside are belong to us

AIG is much in the news these days. But I’m not sure, even now, if people are getting the ultimate message.

AIG is in trouble because it wrote many credit default swaps, in effect guaranteeing others against losses it lacked the resources to cover. We, the taxpayers, are now covering those losses, for fear that not doing so would cause a financial catastrophe. But this means that US taxpayers have now assumed the downside risks for all of AIG’s counterparties.

In effect, then, we’ve already nationalized a large part of the financial industry’s potential losses.

So at the very least, we have a right to know who the counterparties are: who are we subsidizing, here? And beyond that, shouldn’t there be some quid pro quo? Shouldn’t the US government get something in return for taking on so much of the risk?

His how Martin Wolf puts it in his Financial Times blog:

In 1978, Alfred Kahn, an adviser on inflation to President Jimmy Carter, used the word “depression”. So angry was the president that Mr Kahn started to call it “banana” instead. But the recession Mr Kahn foretold happened all the same. The same may well happen with nationalisation. Indeed, it already has: how else is one to describe the actions of the federal government in relation to Fannie Mae, Freddie Mac, AIG and increasingly Citigroup? Is nationalisation not already the big financial banana?

Much of the debate is semantic.

Here's a graphic from the Martin Wolf blog entry that sums up the bank problem: