Nationalization is more of a fright term than a reality. Most of the public has visions of dictators sweeping up foreign and domestic companies with the stroke of a pen when they hear “nationalization.”
That’s not happening here.
The federal government routinely takes over failing privately owned banks and savings and loans, even in good times.
The difference is the U.S. government is not interested in owning the companies. Its interest is protecting depositors and keeping the financial system functioning.
When a bank or savings and loan fails (it is often because capital has fallen dangerous low), the government steps in, pays off the depositors and sells off the assets. Sometimes, the failing bank is merged into a healthy one.
Yes, the shareholders are wiped out in most cases, but that’s part of the risk of investing. Our system won’t work if taking a risk is rewarded when the company is successful, but shareholders are bailed out if the company fails.
Our financial system works because we protect depositors (who are creditors for the financial company) and not the owners (shareholders).
We have survived federal intervention in the past – remember the savings and loan crisis of the 1980s and early 1990s? Almost 750 savings and loan companies failed, but not one depositor in an insured account lost money.
The downside, of course, is a huge federal deficit. How are taxpayers going to repay this huge debt?
The most important way to repay debts is to have a robust economy that generates an extraordinary amount of tax revenue.
Without a surge in tax revenue (as experienced in the latter part of the 1990s), taxpayers face soaring interest rates, inflation and tax increases.
As unpleasant as it is, we must have a viable financial services industry if there is any hope of an economic recovery.
Many have noted that the same group of people who got us into this mess are getting the lion’s share of bailout money.
That sinks, but we must hold our noses and move forward, hopefully with new safeguards in place to prevent this type of disaster in the future.
