Nationalizing Banks

The current crisis is grounded in a lack of confidence in our banking system. During the past years, many of us wondered where all the money was coming from, not only to fund the coast-to-coast building program but also to buy all the completed projects. Now it turns out that the banks were assuming it was someone else's problem. Not so.

As the various securities failed to meet expectations, the supposedly safe components of these securities also dropped in value. This decline in value affected the equity strength of the inherently levered banks and this lack of equity strength hammered confidence.

Sweden and Japan are both countries that have had similar experiences as a result of real estate booms. Sweden effectively nationalized the banks with privatization following the government take over. Japan simply propped up the banks. The results were different. There was a sharp recovery for Sweden, while Japan was sluggish at best. So far, the U.S. has been helping the banks along a Japanese style prop-up, but something alot like nationalization is arising now.

U.S. authorities are now considering radical new measures to shore up ailing financial markets, including guaranteeing billions in bank debt and insuring all U.S. bank deposits for a temporary period. To do so requires multiple government agencies agreeing that a "systemic risk" exists, thereby invoking a rarely used legal power. If such a measure is implemented, then concerns over enrichment of equity shareholders cannot be far behind.