02 March 2009

Greasing the Skids for Nationalization of Financial Institutions

In an (unpublished) letter-to-the-editor that I sent to the Wall Street Journal a few weeks ago, I expressed alarm at the apparent nonchalance of the American public as the specter of bank nationalization looms, and warned of the loss of freedoms that it signaled:

Let us summarize the government’s step-by-step procedure: (1) Hobble industries for decades with myriad regulations.  (2) All the while, seize by force trillions of dollars earned by individuals and corporations.  (3) When industries inevitably show signs of weakness, blame their failures on “unfettered capitalism,” and magnanimously bestow part of the seized funds in the form of a “bailout” to key corporations.  (4) Use the “gift” as a quid pro quo to exert control over those corporations.  

This form of nationalization may be more polite and subtle than the type achieved by dictators abroad, but it does not change its essence.  The strings attached to government handouts are strings that bind.  We are fools if we applaud the government for throwing leashes about the necks of resented CEO’s, evading the permission it grants to leash all of us.

Don’t Americans understand what is at stake?  Perhaps the public is so saturated with the daily reports of new government programs costing billions, and even trillions, of dollars, that the prospect of nationalizing an industry gets lost in the disorder.  I rather hope that is the case; it is preferable to Americans simply not knowing what nationalization means, or not caring whether companies are run by free citizens or by the government.

No matter what the reason is, not enough people seem to be paying attention.  I am convinced that it is the Obama administration’s intention to wrest control of industries from the hands of private individuals and concentrate that power in the federal government.

Naturally, the administration will have to do so in a more or less stealthy manner, and will deny its intentions every step of the way.  "This administration,” said White House Press Secretary Robert Gibbs in a recent daily briefing, “continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government.”[Note 1, emphasis mine.]  Far from being a reassurance that bank nationalization is not a possibility, this lukewarm disavowal is a thinly disguised attempt to soften up the American public for an eventual takeover.  In a week or a month or a year, President Obama will be able to feign reluctance as his administration seizes control of one company after the other, and will do his best to characterize his activities as “regulation” or as “temporary emergency measures.”

Treasury Secretary Timothy Geithner

photo from United States Department of Treasury

Treasury Secretary Timothy Geithner couched the issue in a similar manner in a white paper on his Capital Assistance Program (CAP), a part of the Treasury’s Financial Stability Plan:

The economy functions better when banking organizations are well managed in the private sector.  U.S. government ownership is not an objective of CAP.  However, to the extent that significant government stake in a financial institution is an outcome of the program, our goal will be to keep the period of government ownership as temporary as possible and encourage the return of private capital to replace government investment.  In addition, any capital investments made by Treasury under this plan will be placed in a separate trust set up to manage the government’s investments in US financial institutions.  The objective of the trustees will be to protect and create value for the taxpayer as a shareholder over time. [Note 2.]

Again, this ostensibly expresses that the federal government has no interest in seizing control of banks.  But what it actually indicates is precisely the opposite: that the government can and will exercise that power.  The threat is indirect, and the more chilling and ominous for it.  It is as if while you are having an argument with another man, your opponent suddenly pulls out a gun, puts it down on the table in front of him, and says, “I have no intention of using that gun.”  The words belie the action.  

It is completely contradictory and disingenuous for the government to say, in effect, “Ownership of private firms is not a goal of ours... but if we really have to seize control, it will be as temporary as possible.”  Who determines if (as the CAP paper puts it in its craven passive voice) a “significant government stake” is a necessary “outcome of the program?”  The government.  Who determines how temporary is “temporary?”  The government.    

In some respects, it is a moot point to talk about nationalization as something that can yet be averted.  It is already here.  In using the bailout money to dictate limits on executive pay in financial institutions, the federal government has already begun the process.  A provision of the American Recovery and Reinvestment Act of 2009, H.R. 1, signed into law on 17 Feb 2009, limits the salary and bonuses of top executives in financial firms that have received or will receive Troubled Asset Relief Program (TARP) funds.[Note 3.]  Having accomplished this, what could the government not now demand from any company that it plied with loot?

Defenders of nationalization will here claim that the government has every “right” to dictate terms to firms that have accepted bailout money; but this logic is based on a faulty premise.  The implication is that it cannot be considered tyranny to demand concessions from firms in exchange for the government largesse that they have received.  Indeed, if this had actually been a voluntary exchange, the type that occurs in laissez faire capitalism, that would be true.  However, there is nothing voluntary about it.  Companies that received bailout money were either directly or indirectly forced to take it.[Note 4.]  The government cannot excuse itself from tyranny on the grounds of quid pro quo, when the entire situation is a consequence of its previous tyrannical actions (i.e. its seizure and redistribution of property in the form of a “bailout”).


Many of the apologists of nationalization recognize the importance of not calling it “nationalization,” a term that (hopefully) isn’t yet swallowed quite so easily by some Americans as it is in other parts of the world.  (I’ve recently been seeing the word “receivership” replacing “nationalization”; having the connotation of a temporary state, it serves as a polite euphemism.)  Paul Krugman, the economist who holds about the best imaginable left-leaning credentials - Princeton University professor, Nobel Prize-winning economist, and New York Times columnist - placates us accordingly.  Referring to the fears of bank nationalization, he wrote:

We are not talking about fears that leftist radicals will expropriate perfectly good private companies.  At least since last fall the major banks - certainly Citi and B of A - have only been able to stay in business because their counterparties believe that there’s an implicit federal guarantee on their obligations.  The banks are already, in a fundamental sense, wards of the state...

What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded - namely, ownership.[Note 5.] 

This passage echoes what I wrote above: the process of nationalization has already begun.  It also demonstrates an application of the same false logic that I described - evading the distinction between voluntary exchange and government coercion.  


Unfortunately, we cannot forever count on the average American’s aversion to big government.  The liberty that was so dearly earned by our forefathers has been withering under a relentless attack.  Freedom, that rarest jewel of history, can be broken by neither a hammer nor a sword... but can erode and decay over time if left unattended.  For decades, both Democrats and Republicans have been expanding the role of government in our lives, disagreeing only on the particulars by which, or the degree to which, our individual efforts may be disposed.  

If we are to somehow forestall the complete demise of liberty in this country, we will have to convince Americans to wake up and identify the bewildering events that they see on their televisions and laptops.  We will have to convince them that they should not take the word of “experts” without understanding what they say; that they should not be placated when they hear that government takeovers are only “temporary emergency measures”; and that they should be suspicious of politicians that blame crises on a few “greedy Wall Street executives,” or on any other envied or resented citizens that serve as suitable scapegoats.  To save America, we do not need the average American to be a genius, or brilliant, or even unusually smart.  We just need enough of us to be honest, think independently, and not surrender our values in exchange for a promised “free lunch.”

I have long encapsulated the difference between the cultures of America and Europe by means of comparing the American Revolution with the French Revolution.  If two centuries ago you had asked the average American - the farmer, the craftsman, the clergyman, the fisherman, the printer -  what he longed for, he would have said, “Liberty!”  If you asked the average Frenchman what he wished for, he would have answered, “Bread!”  Therein lies the difference between freedom and servitude.

If we cannot convince enough Americans of this, then we have little hope of recovering our freedom.  An anonymous comment to another one of Krugman’s blog posts, signed by “Incognito,” aptly captures the sentiment of this new American sheep, the tired American that will gratefully accept manacles (or better still, feel relief when it is his neighbor who is enslaved instead of himself) in exchange for a loaf of bread.  The “them” he refers to is the government as he laments:

I just want them to fix it.  I don’t care how it’s done, or how expensive it is, just fix it and make sure it doesn’t happen again.[Note 6.]


  1. Quote from Yahoo News, “White House tries to end bank nationalization talk,” 20 Feb 2009, http://news.yahoo.com/s/ap/20090220/ap_on_bi_ge/obama_banks.
  2. Treasury White Paper: The Capital Assistance Program and its Role in the Financial Stability Plan,” Department of the Treasury of the United States of America, 2009, p. 3.
  3. The final version of the American Recovery and Reinvestment Act of 2009, H.R.1, is available online at http://fdsys.gpo.gov/fdsys/pkg/BILLS-111hr1ENR/pdf/BILLS-111hr1ENR.pdf.  I spent a fruitless hour looking for the particular passage on executive pay limits, only to discover that I was looking at an earlier version of the bill that didn’t have that clause.  This prompts the question: did each legislator himself have the time, inclination - or let’s face it, endurance - to read the whole bill before he signed it?  See also “Stimulus Plan Places New Limits on Wall St. Bonuses,” The New York Times, http://www.nytimes.com/2009/02/14/business/economy/14pay.html?scp=5&sq=cap%20on%20executive%20salaries&st=cse.
  4. For example, see “Healthy banks complain: we don’t want bailout,” International Herald Tribune, 2 Nov 2008, http://www.iht.com/articles/2008/10/31/business/31plan.php.  Even when the banks aren’t literally strong-armed into accepting bailout money, though, the mere presence of government largesse distorts the market, so that many must either accept it or perish.  No private firm can compete with an entity that can legally seize or print its own money.
  5. Paul Krugman, “Nationalization fears,” The New York Times, 20 Feb 2009, http://krugman.blogs.nytimes.com/2009/02/20/nationalization-fears/.
  6. Paul Krugman, “All the President’s Zombies,” The New York Times, 25 Feb 2009, http://krugman.blogs.nytimes.com/2009/02/25/all-the-presidents-zombies/?scp=1&sq=nationalization%20receivership&st=cse.

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