There’s no question that nationalizing a few of the biggest banks would be less costly and more efficient than the present patchwork approach, says journalist and author Doug Henwood, yet Obama administration officials still believe there’s something perilously un-American about doing it. In the end, he adds, “I think the situation is dire enough that all these ideological objections may be overcome pretty soon.”
Henwood, with whom I last spoke just over a month ago, is the publisher of the invaluable Left Business Observer newsletter and the host of a weekly radio show that’s broadcast on New York’s WBAI and Pacifica flagship KPFK. (The shows are archived at the LBO site.) Yesterday we talked on the phone about subjects ranging from the banks and the Obama mortgage relief plan to the sorry state of leading economic indicators in the U.S.
SP: Let’s start with the question that seems to be obsessing a lot of people right now. Why do you think the Obama administration seems so bent on avoiding the nationalization of some of the major banks at all cost?
Doug Henwood: That’s a very good question. I would say it’s partly the political ideology of America. We just don’t nationalize thing here–although the FDIC, of course, has nationalized hundreds of banks over the years, and Citigroup itself went through a quasi-nationalization in the early 1990s. But something so explicit and high-profile, I think, would be very complicated to manage in the U.S. political system.
But it’s amazing to see people like Lindsey Graham and Alan Greenspan calling for nationalization. I think the situation is dire enough that all these ideological objections may be overcome pretty soon. But on the other hand, they’re talking about converting their existing stake in Citigroup to something like 40 percent [equity]. Something seems magic about that 40 percent figure–if you go above that, it seems too much like nationalization.
But if you look at the numbers, Citigroup is worth, what, $10-$15 billion now? The government stake in it is actually much, much larger than that. The government would be doing itself no favors to take such a small stake, but it seems like they really at all costs want to avoid nationalization. The only thing I can think of is just that they don’t want to be seen as socialists.
Obama himself, in an interview on ABC News a couple of weeks ago, gave a very thoughtful, serious comparison and analysis of the Swedish and Japanese approaches to financial crisis. It’s clear he understands the issues very well. And yet he said, you look at the comparison of Sweden and Japan, it’s clear the Swedes did the right thing–but we can’t do that. One of the reasons he cited was that they only had five banks, and we’ve got thousands. That’s partly true, but our major problems come from about five banks, so it’s not really [such a flawed comparison]. Sweden is a much smaller place, but we could certainly handle the nationalization of several major institutions. That’s not prohibitively complicated.
But then he also said, in Sweden they have different political traditions–a different relation of the government to the economy. Meaning, of course, that Sweden’s a social democracy with a very activist government and a very large public sector. And he says, we don’t do things like that here. We want private markets to control everything. There’s this unspoken, or sometimes spoken, assumption that the public sector can’t do anything right and the private sector is a bastion of efficiency. Clearly, the private sector has badly mangled the financial system. They’re not models of efficiency or sound management right now.
The rationale for opposing nationalization seems in tatters, but there is this kind of instinctive response that we just don’t do things that way. America’s special; we do things differently; we can’t do it because we’re Americans. It doesn’t really seem any more complicated than that.
Maybe there’s some reason–you hear of anxieties that if some banks are nationalized, it will hurt the surviving non-nationalized banks. Certainly a lot of the banks that will not be nationalized would be concerned that if Citigroup was nationalized, it would have the support of the government and, in essence, have free money to play with.
That may be part of the reason, but if so I think it’s a combination of that plus this really deep-seated ideological aversion to [nationalization]. Especially because Obama himself does not want to be painted as a leftist. He wants to be painted as a centrist, a pragmatist, post-political. But right now it looks like the pragmatic, post-political thing to do would be to nationalize them.
SP: The ironic thing, as you alluded to, is that the staunch ideologues of unfettered capitalism are now starting to embrace nationalization. Is it putting too fine a point on things to say the government won’t nationalize the banks because the banks already own the government?
Henwood: [laughs] Well, it does seem like the banks–it’s hard to say, but sometimes it does look like Goldman Sachs and the government have merged. It’s hard to say who’s the senior partner in that arrangement. But you know, a lot of very critical people in the administration have a history with Wall Street. [Treasury Secretary Timothy] Geithner, while at the Fed, was very close to Wall Street. He didn’t do a bang-up job there. Larry Summers’s last job was at a hedge fund, D.E. Shaw.
These guys don’t want to step on the toes of the people who funded them. Obama himself got big checks during the campaign from hedge fund people. He’s very close to Wall Street and he cherishes that closeness. You know, sometimes I think there’s kind of a sociological explanation for it. Franklin Roosevelt came out of the aristocracy, and was quite willing to kick his class brothers around a little bit. Obama is an upwardly mobile guy of fairly modest origins who may be in awe of the rich and the powerful. Maybe you have to emerge from that milieu in order to control it properly.
SP: But wouldn’t nationalization be more efficient both on the front end and the back end? What I mean is, in terms of both the outlays required to get capital flowing again, and the back-end prospect for recovering public moneys invested?
Henwood: Oh, there’s no doubt that nationalization–and I’m talking about a very orthodox nationalization, not turning these banks into public-interest entities; I’m talking about taking them under the public sector’s wing for a few years to nurse them back to health, then privatize them again.
That’s what the Swedes did, and it worked very, very effectively. It was expensive at first, but the Swedes got back most of their money when they privatized the firms. There’s no reason that couldn’t work here.
Additionally, if the government nationalized just a few of the major banks, it could cancel the derivative contracts they have with each other. If it owned both sides of the trade, it could just wipe those things out, and it would clean up some of the mess in these guys’ balance sheets.
But [the U.S. government] just seems terrified of the prospect. And it would be a handful. Running several banks the size of Citigroup and Bank of America would be a management challenge. It’s not clear that there’s a whole lot of executive talent around that could staff these nationalized banks. There are hints, for example, that [Bikram] Pandit at Citigroup is secure in his position because the government can’t figure out who could take his place.
But I think they’re going to have to do it. It may be just weeks before these objections fade away.
SP: Let’s talk about the mortgage plan that Obama outlined the other day. There’s some lip service to cramdown provisions, but there’s a great reluctance to make banks write down any of the principal of mortgages. Bloomberg News suggested that all in all, it’s a great deal for banks. What did you think of the plan?
Henwood: It’s not a bad deal for the banks, yeah. I think they’re really trying to keep them from taking losses. They’re also trying to avoid–well, “rewarding bad behavior” is one of the phrases flying around, thanks in part to CNBC’s Rick Santelli and his rant last week.
SP: That’s public bad behavior, you mean, not the banks’ bad behavior.
Henwood: Right. The banks can misbehave all they like and they seem to suffer no consequences for it, but the public–we can’t have them get a break on their mortgages. We’ll see what happens with these cramdown provisions. I don’t know. If that happens, then it’s a much better deal for homeowners and a much worse deal for banks. But it looks like they are trying to restrict any kind of relief from these provisions to loans that are in fairly good shape. The most troubled borrowers are going to find themselves out of their house anyway, so it’s really like they’re just trying to protect the near-healthy while still throwing the very sick out on the street.
SP: I wanted to ask you about an idea that has received a fair amount of coverage in the financial press, though not in the past week or so, and that is the Fed’s deliberation over whether to start buying long-term Treasuries. To a layperson, this looks like nothing more or less than printing money to buy our own debt because nobody else will buy it in sufficient quantity. Is that wrong?
Henwood: They haven’t really started yet, but they are talking about it. And it’s absolutely printing money. There’s no question about it. Printing money to fund debt. And [Fed chairman Ben] Bernanke was very explicit about this in his famous 2002 speech about dropping money from helicopters that earned him the nickname “Helicopter Ben.” The government could just print money to avoid a deflation and a depression. So the lay perception is correct. That’s exactly what would be going on.
SP: What might the reaction be in world financial markets if the Fed starts doing this in earnest?
Henwood: I think if it’s done in moderation, the world financial markets will like it. It would push down bond rates and push up bond prices. It would help generate some economic recovery. We need a lot more than that, but it would help.
Alarms would start sounding if it looked like the situation threatened to become inflationary. Currently the markets seem to be expecting a couple of years of low inflation, or even the threat of deflation followed by inflation several years down. I don’t really put much stock in these market expectations. People read the price structures of various futures to divine what the market expects, but these markets are not tremendous seers. They’re not great at forecasting the future. They’re really about extrapolating the present and the recent past, so I wouldn’t put too much faith in them.
When Bernanke talked about printing money, he said that a government and a central bank find it well within their powers to turn a deflation into a small inflation. In other words, the government can turn a deflation around by aggressively printing money. Now the risk there is that if things get out of hand, you can end up generating a real inflation and then things could get out of control. That would drive the financial markets crazy. But right now, I think they would be very relieved to see any effort to keep the financial system afloat and prevent a deflation from taking hold.
SP: There’s a sort of collective monthly death watch going on with unemployment statistics. It’s the one major economic indicator that everyone in the press is looking at. I wanted to ask you to survey the state of some other leading indicators. Dean Baker wrote something the other day that was fairly terrifying–pointing out that the decline in U.S. manufacturing over the past three months adds up to annualized rate of 26.7 percent shrinkage. How are the other indicators looking?
Henwood: The manufacturing numbers are really awful, and it’s not just in the U.S. It’s around the world. Industrial production is in terrible shape, and shrinking very rapidly. Three months is not a full year, but if this continues for a full year, we’re really, really, really in trouble. No question about that.
Some other indicators are not so terrible. The weekly retail sales numbers are shrinking, but not at an accelerating rate. That’s judged to be good news these days–when something is declining, but not at an accelerating rate.
The consumer confidence numbers that just came out from the conference board are miserable. There’s very rapid decline in people’s expectations. Now again, this is not one of those measures that’s terrific at seeing the future. It’s really about the present and recent past, and consumers’ view of the present and recent past is quite dire. Their judgment of the job market is dire.
The weekly unemployment insurance claims numbers, which are really the best short-term indicator of what’s going on in the job market, are high but not deteriorating any further. Which, again, is what passes for good news.
Some of the other leading indicators are the same way–declining, but no longer at an accelerating rate. The housing market looks terrible, no two ways about it. Some of the worst numbers ever for housing. The only bright spot in the housing numbers is that applications for new building permits are declining at slightly slower rates than the starts of new houses, which is what happens as the market starts nearing the bottom: Permits show signs of turning around before actual housing starts do.
But these are both still at deeply negative rates, so it’s kind of grasping at straws to find good news in it.
So most of the principal economic indicators are fairly terrible. And not just in the United States but in the rest of the world. Speaking of which, it’s been amazing to watch the rest of the world deteriorate so rapidly. Most major foreign economies are doing as bad as or worse than the U.S., which is kind of amazing.
Since the credit problems started here before spreading around the world, you would think that we would be doing worse than everyone else. But in fact, a lot of places are doing worse than us. Japan is in miserable shape, Germany is in miserable shape, and there are some signs that China is deteriorating rapidly–although it’s hard to read, because Chinese economic statistics are not the most reliable in the world.
People have been talking about a loss of American dominance in the world as a result of the economic crisis. That’s not visible yet. The world is still looking to the United States. The United States is still able to sell its Treasury bonds, while other governments are having trouble floating their paper.
A top Chinese bank regulator said a week or two ago, basically, “We hate you guys. We see what’s happening, we see you issuing all this debt–but we have no choice but to buy your bonds. There’s nowhere else we can put our money.”
We hate you guys for this, he said, but we’re going to continue buying your stuff.
Despite having taken the world economy down, having taken the world financial system to the precipice, the U.S. is not doing worse–is actually doing better than some economies around the world. It’s not what one would have expected a year ago.