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As Banking Woes Grow, Debate Over Nationalization Intensifies

As turmoil continues in the U.S. banking industry, speculation is intensifying over whether the government should take larger ownership stakes in banks. Columnist Paul Krugman and former FDIC chief William Isaac weigh the pros and cons.

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  • JIM LEHRER:

    Next, the new big debate over nationalizing American banks, and to Judy Woodruff.

  • JUDY WOODRUFF:

    The question was posed to Federal Reserve Chairman Ben Bernanke today. It's been raised in Washington and on Wall Street for weeks, and we heard it come up in Gwen's conversation just a moment ago. Should the federal government take over troubled banks?

    Well, we get two different views. Paul Krugman is a professor of economics with Princeton University and a columnist for the New York Times. He won the Nobel Prize in Economics last year.

    And William Isaac was chairman of the Federal Deposit Insurance Corporation in the 1980s. He oversaw the government's seizure of the country's seventh-largest bank at the time, Continental Illinois bank. He's now chair of the financial services consulting firm, the Secura Group of LECG, which works with many banks.

    Gentlemen, thank you for being with us.

    And, Paul Krugman, to you first. Just about everybody in the Obama administration is saying they're not talking about nationalization of the banks. Do you believe this is something that's seriously under consideration?

  • PAUL KRUGMAN, Columnist, New York Times:

    Yes. I mean, what are they going to say? At a certain level, you don't say, "Well, we're thinking about it," because that might precipitate a collapse in confidence that might, you know, cause it to happen right away.

    And they have to be aware. They have to be aware that, since they are propping up the banks — you know, the major banks in the United States are already wards of the state. They already survive because there's an implicit lifeline. There's basically the federal government standing behind their liabilities, saying, "We're not going to let these things fail. Don't be afraid of doing business with them, because you know Uncle Sam will come to their rescue."

    They know there has to be a point, just as there is with small banks which get in trouble, there might be a point where they have to take over the banks. Now, they are obviously not ready to do it just yet. But they're clearly considering it.

    And let me just say one important thing, that we do — you know, we nationalize two banks a week. The Federal Deposit Insurance Corporation takes over temporarily two banks a week on average because of problems with the banks. This is not something that is qualitatively different from what we do all the time. It would be quantitatively different, because we don't take over trillion-dollar banks every week, but these are — you know, this is something we do, do all the time.

  • JUDY WOODRUFF:

    And the conversation here, we should point out, is about those 20 biggest banks in the country…

  • PAUL KRUGMAN:

    That's right.

  • JUDY WOODRUFF:

    … the ones with assets over, what is it, $100 billion.

  • PAUL KRUGMAN:

    That's right.