Dr. Doom gives a thumbs up to nationalization

The economist Nouriel Roubini has made his reputation by more or less accurately decrying things he doesn’t like about the economy. In this weekend’s Wall St. Journal, he talks about something he does like: temporary nationalization of troubled U.S. banks.

He tells the Journal: “The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks.”

Roubini also zings the Bush Administration for taking banks that were too big too fail and making them even bigger (for instance, Countrywide and Merrill Lynch into Bank of America, or Wachovia into Wells Fargo). “You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing.”

Of course, Wells Fargo and Bank of America weren’t supposed to be zombie banks. But Roubini argues that in six months, “almost all” of the major banks will basically be insolvent.

He envisions a Sweden-like situation where the banks are nationalized temporarily and then returned to private hands after they’ve been stabilized. Oddly, Bill Maher invoked Sweden’s banks and the idea of nationalization on his HBO show on Friday night. The audience laughed, but let’s be realistic: Sweden’s banking system is much smaller and was much less messed up than America’s. Also, Wall Street seems to hate the idea. Then again, it doesn’t like much of anything these days. Perhaps that’s why it’s sent stock prices back to 1997, in the early days of the Internet Bubble. Those were indeed better times for the stock market.
Roubini’s interview is by parts fawning and interesting. It’s certainly worth a read, especially since he’s funnier about the economy than Maher is.

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