Monday, March 9, 2009

Tiptoeing round the 'N' word

March 9, 2009

Now loath to nationalise banks, West will end up adopting Asian model

By Jonathan Eyal

IN ECONOMIC terms, the last half century was about the seemingly unstoppable march of private enterprise.

But what took decades to accomplish may now be reversed in a matter of months: a growing number of influential commentators in the United States and Europe are arguing that the only way to halt the current economic slump is for governments to nationalise their ailing banks.

To a casual observer, this may appear as a rather old ideological confrontation between left-wingers and hardcore capitalists who believe that markets are the only efficient creators of resources.

But things are not as simple as an ideological divide. It was Mr Alan Greenspan, the former US Federal Reserve chairman and high priest of laissez faire capitalism, who called for the outright nationalisation of America's banks.

And it is the government of US President Barack Obama - one of the most interventionist in America's modern history - which steadfastly refuses to utter the 'N' word.

'This administration continues to believe that a privately held banking system is the correct way to go,' said Mr Robert Gibbs, the White House spokesman.

In reality, none of the protagonists in this debate have a monopoly over truth; both camps are haunted by past historic experiences which indicate that, ultimately, there are grave dangers in either leaving banks to their own devices, or seizing them.

For the moment, the arguments for nationalising banks appear more persuasive.

The bailout plans have clearly failed to work. And economists fear that as the downturn pushes more companies to the wall, the bad debts in the banks' balance sheets will pile up.

So, the argument goes, instead of living for years with so-called 'zombie banks' - technically bankrupt but kept alive on government guarantees - better to nationalise them now, isolate their 'toxic' assets and break them up into more manageable chunks.

This will ensure that any government cash goes on loans for the real economy. And it will also result in the dismissal of all the 'fat cat' bank bosses responsible for the disaster.

Besides, governments already own a majority shareholding in top banks - up to 40 per cent in the US' Citigroup, and over 70 per cent in Britain's Royal Bank of Scotland. Moving from this to outright nationalisation is a question of just good sense, rather than ideology.

What is more, the US has periodically nationalised small failing banks and the Europeans have operated nationalised banks as late as the 1980s.

So why this tiptoeing around the N word?

As Ms Diane Casey-Landry, the chief operating officer of the American Bankers' Association, pointed out, 'one of the challenges is defining exactly what people mean by nationalisation'.

An outright takeover with no compensation for existing shareholders will pulverise not only individual investors, but also large pension funds which hold stakes in these banks.

Yet nationalisation with full compensation could be prohibitively expensive. To date, US banks have admitted to more than US$1 trillion (S$1.5 trillion) worth of losses, but the fear is that the total may be double that.

Furthermore, the past performance of nationalised banks has hardly been encouraging. The longer they are held in state hands, the more they become political tools, magnets for corruption and inefficiency.

The example of Sweden, which experienced a deep financial crisis a decade ago, is now held as proof that things can be handled differently. The Swedes nationalised their banks but kept them free of political interference. And they returned them to the private sector after a few years.

Yet Sweden, a relatively small European country which accomplished this feat at a time when the rest of the global economy was growing, may be the exception.

To see how matters are likely to turn out now, one need not look any further than France, where two failing banks were recently merged. To much controversy, the man appointed to manage them has scant financial experience, but one great asset: he is a trusted personal adviser to the French President.

Throughout Europe, nationalised industries remain synonymous with shoddy products and services. Alitalia, Italy's state airline, is a European joke. So were France's attempts to create a 'national champion' in the computer industry, or Britain's state-owned car manufacturers.

And the bosses of these nationalised companies are usually paid just as much as some of the top private sector bankers.

More importantly, Western leaders remain only too aware that, despite the failure of the current capital markets, electorates are not clamouring for a return to left-wing ideas.

Socialist parties remain in the doldrums in all the key European states.

And, regardless of his political beliefs, President Obama has no intention of being pigeonholed as a nationaliser either.

This is not to say that bank nationalisations will be avoided altogether. The situation is fluid, and the governments' hands can be forced at any moment.

But, if they come, nationalisations will be decided on need, rather than conviction.

What Western politicians still refuse to acknowledge is that, as a result of the current crisis, their economic model will increasingly resemble that of most Asian nations, where the state plays an important guiding role, while encouraging an open economy.

The West spent decades dismissing Asia's 'mixed' model as irrelevant. But it will now be forced to adopt it.

Meanwhile, Western banks will remain neither private fish, nor public fowl, but a mixture of the two, a hybrid which defies any ideology.

[Republicans and Capitalists clamour for banks to be nationalised, and Democrats refuse - surely these are signs of the end of the world. But perhaps Obama is right to say, this is not about idealogies but about pragmatic realities.]

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