To put it succinctly, banking is taking a beating. Lately we have been feeling like we have been walking around with a rabid chipmunk in our undershorts - it has been that painful. Bank failures, regulatory pressure and bad press are just the tip of the iceberg and the recent BofA/Thain scandal doesn't help. When Saturday Night Live runs a skit on "North American Savings Bank," where they have the tag line of "Your deposits are safe because we don't make loans" (they require 90% down payments for their mortgages) and you are the only one in the room not laughing, it is time for a long vacation. The latest not-so-funny idea comes from this concept of nationalizing banking.
If you dismiss nationalizing banking as a crazy concept, be careful, because many people thought recycling food waste, paying the IRS to electronically accept taxes and Arnold Schwarzenegger as Governor were crazy - but they came to pass. With more than 8,400 banks in this country, it is not possible to nationalize the entire banking industry. However, the government could conceivably nationalize the top 20 banks. The only reason to do this is to control management and lending. On both counts, the government would be woefully misguided.
For starters, it doesn't need to do this. Having TARP money invested in 300+ banks, combined with additional regulatory oversight, gives the government enough control. Let's face it, when you have the government as a co-owner, you will always be the junior partner. If the government really wants banks to make home loans to non-creditworthy borrowers by taking collateral that is dropping in value 1% per month, it has better ways of accomplishing this than taking over the banking industry. Bankers are plenty motivated to control costs and excesses. The additional TARP reporting requirements, combined with the scorching limelight of the press, will also control costs.
At the end of the day, there is very little reason to nationalize banking. The reality is that the government couldn't run banks any better. They are not doing such a great job with the Post Office (also insolvent), DMV (probably the most inefficient institution on the face of this earth) or Social Security. This is to say nothing of the performance of Fannie and Freddie, also quasi-gov't controlled entities. Banking certainly has problems because it was at the heart of the economic bubble. A bubble not caused by banks, nor banking excesses, but by lower interest rates and subsidized home mortgages. If the media is looking for blame, it can start with the US Gov't.
The mere talk of nationalization scares us, not because it will come to pass, but because it is undermining confidence and capital. Should the Gov't ever seriously consider coming in and wiping out shareholders in a Citigroup or BofA, it will be the death sentence to a great many banks. Such a decision would result in monumental wealth destruction and would severely hurt the US.
Hopefully, the thought of nationalizing banks will die quickly and be recognized for what it is - a macabre fantasy. This is similar to a new movie coming out called "The International." In it, a big bad bank attempts to control the world. Give us a break - we are not sure how it is at other banks, but at ours, we have difficulty just controlling the heat in our building, let alone the world.