Monday, March 2, 2009

Bank Nationalization and Three Fingers

This post relates to the following Keystone Economic Principles:
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.

5. Incentives produce “predictable” responses.

In case you haven't heard, Virginia and much of the eastern seaboard have been walloped by a late-season snow storm. Consequently, I'm home and I have some extra time to blog.

There has been some recent debate about nationalizing major banks. I ran across this opinion piece in The Wall Street Journal (HT to Planet Money). It is a piece about the last time the U.S. nationalized a bank - Continental Illinois - in the 1980s. I joined the Federal Reserve Bank of Chicago, which is located across the street from what was the Continental Illinois Bank, in 1991. Continental came out from under government supervision the summer of 1991 and there was a huge party on the street outside the bank.

But the years between the takeover and the party were not pretty. And the author of the article, William Isaac who was head of the Federal Deposit Insurance Corporation (FDIC), does not seem to think nationalization is a good idea. I'll leave it to him to tell you why. He had a much better view than I can provide.

In a somewhat related piece from NPR (HT to Planet Money, again), Alex Davidson and Adam Blumberg discuss the plusses and minuses of a bank bailout with a number of economists. And while there is a strong case against providing funds to a group of businesses that have made some significant errors of judgment, the point is also made that the rising debt load that tipped the economy in the first place is as much the fault of American consumers as it is the fault of American bankers. As I've pointed out to teacher and student groups alike, it often helps to remember that when we think we see a problem in the economy and we begin pointing fingers, three of them point back at us.

Both pieces are interesting, and if you discuss bailouts or nationalizing the banks as part of a unit on banking or the role of banks in the economy, either could make an interesting add-on.

I look forward to your thoughts.

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