Why Doesn’t the Treasury Turn Over Banks to the FDIC for Inspection?

BY busadmin  April 10, 2009 at 11:21 AM EDT

U.S. Treasury building; afagen via Flickr

Question: Why didn’t the U.S. Treasury turn over the banks to the FDIC and let the FDIC do an audit and dispose of the rotten assets?

Paul Solman: “Turn over”? You mean TAKE over. This is the question being asked by economists from Paul Krugman to Joe Stiglitz to Simon Johnson. See our Good Bank, Bad Bank story for a partial explanation.

The argument against nationalization of the banks is that, as one former Treasury honcho put it to me in an email, “you don’t want the gov’t – the political process – deciding who gets funding and who doesn’t. That’s not the way to make an economy productive. Look at Freddie and Fannie under gov’t management.”

“Disposing of the rotten assets” means, for example, selling off homes that people can’t pay for. How do you evict people if you’re the government? Imagine the political pressure not to do so.