More from ‘Bad Bank vs. Good Bank’

BY busadmin  February 9, 2009 at 1:08 PM EST

Citigroup; AP photo

While awaiting a response to my answers to your questions from MIT’s Simon Johnson, who is about to become this quanda’s newest guest vetter, perhaps it would be interesting to read a bit more of our interview with him last week on ‘Bad Bank vs. Good Bank.’ We didn’t have time in the segment to explore the issue of government nationalization more fully, so here is an excerpt to our discussion:

PAUL SOLMAN: Why can’t the U.S. government compel the banks to do whatever the heck the U.S. government wants it to do [it] is keeping them in business? Tell them they can’t pay high salaries; tell them they can’t buy other banks unless it’s absolutely prudent to do so. What’s preventing them?

SIMON JOHNSON: So, in the United States we have a bit of a problem with nationalization. I would say something of a hang-up, actually. In most countries what would happen is the regulator would come in and say to the big banks that are in trouble, “Okay guys, the value of your assets (that’s the loans you’ve made) is a lot less than the value of your liabilities (that’s your deposits and the money you borrow from people). You are out of business! We are revoking your banking license; we are taking over the bank.”

And when the government does that – that’s a nationalization – they can do whatever they want; what they will do is split the bank between bad assets and they’ll take that off and have people minimize the loss on that and good assets in people and buildings which they will say, “Now this is a bank, we’ll take it and run it as a bank.”

PAUL SOLMAN: So that sounds terrific! I think most of the people in our audience would say, “Perfect, why don’t we do that?”

SIMON JOHNSON: And we do it in some instances. The FDIC when it takes over banks does something very close to what I just described. They sell the bad parts to other banks. They don’t get into the business of running the bank itself and that’s the catch. Right? We’re not comfortable with the government running banks in the United States. That’s not something the government has done traditionally and it’s not something most people would think the government would be good at doing – deciding who should get a loan.

PAUL SOLMAN: But as opposed to the jokers who’ve completely ruined the system? [I don’t believe I would have used “jokers” on the air]

SIMON JOHNSON: Well, that’s a good comparison and I think it’s a totally fair comparison. Unfortunately, I would say the evidence from around the world really is [that] the government is a very bad lender. So put it this way: Government loans would make sub-prime loans look good!

PAUL SOLMAN: Because?

SIMON JOHNSON: Because it would get very political. Think of the lobbying that we already know has gone on around the bank bailouts. Various congressmen have made various representations to Treasury about the certain kinds of access banks should and shouldn’t get. Right? That’s just the tip of the iceberg.

If the government was running banks think of how politicized that would become. Think of the lobbying dollars that would go into deciding who’s going to get loans and on what kind of terms.