Free Markets, Free People

Nationalization of banks unlikely

Fed Chairman Ben Bernanke says bank nationalization is unlikely:

Stress tests of big US banks that start this week are unlikely to lead to any of them being seized by regulators and nationalised outright, Federal Reserve chairman Ben Bernanke told Congress on Tuesday.

His comments provided the clearest signal yet that US authorities hope to support major banks as going concerns in the private markets, taking equity stakes as necessary to shore up their capital in what would amount to partial nationalisations.

Stocks rose in response, with the S&P 500 index rising 4 per cent from the previous session’s 12-year lows. Both Citigroup and Bank of America rose about 21 per cent to lead the market higher.

Asked whether the stress tests will lead regulators to move in to take outright control of some banks under powers used to deal with failing institutions, the Federal Reserve chairman said: “No, I don’t think so.”

He made it clear that he does not believe that outright nationalisation makes sense today.

“I do not see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalise a bank when it just is not necessary.”

He said the authorities had other ways to “exert adequate control to make sure they are doing what is necessary to become healthy and viable”.

Obama has been trying to play down nationalization for the last week as well, though some would argue that a partial nationalization has already taken place.

You have to wonder if nationalization would cause a run on banks. Wall Street was clearly worried about the prospect. Stocks tanked last week even as Obama was denying plans to nationalize, but they jumped when Bernanke said nationalization was unlikely.

Despite Obama basically telling us last night that the Era of Big Government is back and on steroids, Wall Street was has been skeptical of his plans. For the first time in months, I’m proud of Wall Street.

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2 Responses to Nationalization of banks unlikely

  • Why would nationalization cause a run on the banks?  If the government is taking over what is perceived to be a failing bank, I would think depositors would be more comfortable leaving their money there.  However, if you mean that talk of nationalization would frighten depositors into believing their bank is the next Lehman Brothers, that could be a trigger for a run on a bank.  Deposit insurance has already been increased, and with the government explicitly owning the institution, a depositor may think it would stand behind the deposits rather than close down the institution without regard to its accounts.

    However, if you are a stockholder in a bank, the prospect of nationalization should scare you because you are about to be wiped out.  This could cause the stock price to tank.

    • It’s a matter of perception: do you believe that nationalization will make the bank safe for your money or not.  If yes, then leave the money there.  If not, then get it out ASAP.

      With Uncle Sugar getting into the business of telling people how they can and can’t spend their money, I’d say that putting money into ANYTHING controlled by the US government is a pretty stupid thing to do.  Further, with Uncle Sugar’s obvious future need for lots and lots and LOTS more money to fund all the social program crap that is coming down the pike, what more obvious way to get the money than by “investing” the depositors’ money in these programs?  Libs have done this sort of thing before.