Simon Johnson: Nationalization for Beginners

The last video I posted introduced a professor in MIT, Simon Johnson, who I thought was brilliant in the lecture. (He’s the type I wouldn’t mind, and perhaps look forward to, going to school for.) He maintains a blog called The Baseline Scenario (find link on the sidebar) and today, he laid out well five possible definitions of nationalization and distinguished between what is currently being feared by the markets and what may in fact be in the heads of its proponents.

1. Owning more than 50% of the bank, by which people typically mean owning more than 50% of the common equity, but he argues this depends on whether the (stock) ownership comes with voting rights or not

2. Consolidating the bank onto the government balance sheet, which happens once the government owns 80% of the bank (and as a result, takes over the debt of the institution as well)

3. Turning the bank into a government agency – this is when the government actually controls the activities of banks, which is what he and free marketers don’t want

4. FDIC-style conservatorship, which according to him is what the proponents of nationalization have in mind. He further describes:

The bank itself is shut down and its assets are transferred to a new entity controlled by the FDIC. The FDIC attempts to maximize the value of these assets, typically by selling them to another bank or banks. From the customers’ standpoint, little changes during this period: the branches, ATM machines, web site, and so on remain in operation during the transition, except that customer may not be able to withdraw amounts above the insurance limits.

5. System-level nationalization – so it doesn’t lose its meaning, straight up from the blog:

[T]he government is where the money comes from, and the government decides on a high level where it goes, through capital injections, loans, and securities purchases. And the government bears the vast majority of the risk. The net result is we have a semi-nationalized banking system largely made up of some very sick but private banks.

Find the rest of the entry (and start following him, too) here.


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