Crime and Punishment

Here’s to hoping that Congress gives the Treasury Department and the Federal Reserve more power to take over and manage insolvent financial institutions, especially if this means that the administration is taking the first step towards nationalization.  For one, I think the idea is right on the merits; if the banks’ assets are actually worthless (and there’s a good chance that they are), then inducing the private sector to revalue these “toxic” assets (the Obama/Geithner plan) amounts to little more than tossing taxpayer money at the same folks who “managed” the banks into insolvency.  Nationalizing troubled banks won’t be cheap, but the advantage is that under a nationalization plan there’s no need to immediately revalue the toxic assets; the government can simply keep them in its backpocket, wait until to the markets improve, and then sell them for the best price it can fetch.  What’s more, the government can remove market pressures from the nationalized banks and guarantee their solvency.  With the faith and credit of the government behind the nationalized banks, they can be recapitalized, resume lending, and sold back to the private sector once they’re on the path to recovery.

I’ll be honest though, although my first priority is for a plan that makes economic sense (which this does), my second priority is for a plan that actually punishes the reckless investors and managers responsible for this crisis.  The advantage of a nationalization plan is that it wipes out the shareholders and allows the government to fire senior management.  Part of reforming the financial system means reforming the culture of finance, and actually doling out punishments is a good way to begin the transition into a more sensible and responsible banking culture.  By contrast, the Obama/Geithner plan does nothing to account for the failures of bank leadership, and even gives Wall Street incentives to game the taxpayers out of their money.

I should add too that part of my hunger for punishment is driven by the fact that the bankers who got us into this mess have yet to apologize for their recklessness.  Ezra Klein rightly denounced the bankers for their sickening lack of responsibility.  As he writes:

They should be begging for a shot at redemption. They should work without pay, without sleep, without credit. They should wear sackcloth and ashes. But more than that, they should be trying to help.

The fact that they aren’t, the fact that they’re out giving each other bonuses, buying private jets and patting themselves on the back for a job well done is insulting to the rest of us who have to live with their monumental incompetence.  It’s galling, and even if we don’t nationalize, we ought to do something to punish these fools for their stunning negligence.

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