In other words, to the extent that banks and capital markets are in the same basic business—intermediating between savers and borrowers—I take John to indeed saying that the latter ought to be run as (or replaced by) public utilities. But perhaps he’ll step in and explain why I’m wrong.

Well, folks can read the thread for themselves, and decide. But it’s hard to deny that when the view was expressed there that much of the work of financial intermediation that is done, in English-speaking countries, by profit-seeking agents in financial marekts, could instead be done in a rules-based way by public or quasi-public instituions (i.e., by public utilities) you expressed rather strong skepticism that anything like that was possible, at least without an unacceptable cost in slower growth.

And who knows, maybe you were right. That’s why it would be so interesting to see a debate between you and John Q. on the subject.

On that note, perhaps this is all the fault of anti-smoking regulation; would be interesting to see a graph of the decrease of indoor smoking via regulation to the rise in other risk taking.

It seems we have three choices:
(1) nationalize insolvent banks (maybe, most of them?); have politicized negotiations with debtholders as to how they will be paid off. The Feds absorb the toxic assets at huge expense and the resulting “good bank” is sold off, with previous debtholders likely getting a large share.

(2) have the Treasury and the Fed make huge subsidies to insolvent institutions; any and all comers mostly welcome. Either thru free grants or hugely over-market purchases of toxic and merely tainted assets, the banks are restored to their pre-meltdown health and go about their merry business.

(3) Strictly Libertarian: encourage Messrs. Geithner and Bernanke to take up pipe-smoking, and encourage them how to stroke their chins while murmuring, “hmmmmm.” The US Government could, however, recycle old Greenspan aphorisms about free-markets’ eventual self-corrections.

As a hopelessly WAG, options (1) and (2) cost one to three trillion dollars, and might have a future expense of a like amount due to crowding out other investments over many years. Option (3) costs at most a few thousand dollars in direct cost, but probably results in a few dozen trillion dollars of lost GDP.

It is easy to paint a picture where arm’s-length relations to Management might be hugely better than the uninformed supervision that caused the mess. Yes, it could also be very bad.

It is also very easy to see how the subsidy option is perceived as the biggest involuntary transfer of wealth from the middle class to the wealthy, cause for insurrection, even. The Senate has gone along so far based on a very thin layer of trust that Obama will exact a fair exchange from the “greedy” individuals who caused our troubles, in his words.

If those who oppose nationalization as problematic would choose to explain how options (2) or (3) as superior, I think it would be very helpful.

BZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZT. Your answer was ‘blame the CRA’, which is wrong!

However, thank you for playing ‘right-wingers always play the race card’!

No I wasn’t. I might or might not believe it to be the case, but I wasn’t.

But, in essence, that is neither here nor there. In fact, the private sector acted as rationally as it could by pumping money into the housing bubble. In other words, it wasn’t some contingency that caused the private sector to misallocate capital. Nor was it interference from the government – in fact, the degree of government regulation diminished. Rather, the problem was one of structure. The private sector, contra the neo-classical model, doesn’t operate under conditions of full employment, and does operate within a business cycle that determines the investment landscape at any one time. In other words, it was due to the structure of the private sector that capital was allocated suboptimally and inefficiently. The conservative economic policies of the Clinton and Bush administration had retracted the kind of positive interference by the government to give the private sector the fullest possible space to maneuver. And the private sector took advantage of that space – in fact, in 2004, you would find conservative economists or publicists, like Mankiw and Larry Kudlow, bragging about how well it was operating. It was a boom. However, this boom depended on battering the bargaining power of labor so that there was no median rise in household income, while at the same time creating more credit for the median household to use.

The housing bubble, in other words, was the best solution the private sector, under the freest conditions since the 1920s, could come up with.

Now, those conditions are not going to be changed no matter how much money is poured into failing banks and hedge funds. They are only going to be changed by inflating incomes. This will not come about if business and commerce aren’t revived. But there are no sources within the private sector for that revival. Which is why liquidate liquidate liquidate will only lead to ever worse conditions. To revive the economy in this phase of the business cycle, command and control economics, using the power of the state to, for instance, capitalize a Reindustrialization facility, is the best and shortest way.

Again, the argument here isn’t whether the Democrats or the Republicans should have done x or y to regulate Fannie Mae. The argument is that the regulatory environment was the most business-friendly since the twenties, and the Free markets responded by allocating capital in those ideal conditions as the market decided was most efficient – that is, most profitable. it seems to me that you don’t get to test many economic models as well as we get to test the model of free markets lately.

Daniel Davies was arguing strenuously against exactly this view in comments here a couple months ago. Wonder if he’s had a rethink? if not, would be very interesting to see a good intra-CT debate on the subject.

The problem is that the housing bubble was an enormous private-public partnership in screwing up. The reason why I’m skeptical (not dead-set against or hating or whatever) of the cheerleading for nationalization is because it doesn’t seem to admit the enormous part that government tweaking with incentives had to do with it. Government influence on the lending rates influenced it. Government tax advantages for home ownership influenced it. Government incentives for higher-risk buyers influenced it. Government voicing conerns that much of the classification of ‘high-risk’ was really racial animus (the late 1990s ‘redline’ debates) influenced it.

Now the private market did lots of stupid things too. They sliced and diced so many things that they divorced the risk analysts from the risk takers. They made awful loans. They overestimated their abilities based on a generally positive economic environment.

There were lots of screw ups from the government and the private sphere. But contrary to much popular leftish opinion, many of the government screw-ups were not just a function of Republican administration. (In fact one of the most obvious ones, the Fannie Mae rule changes, was done by Democrats in the face of Republican opposition).

I would tend to argue that political pressures (including many ‘Democratic’ political pressures) overtook good judgment in government just as financial exuberance overtook the private sphere. I would further argue that governments have not proven particularly good at recognizing and popping bubbles. (See for example UK housing bubble anyone?). I would suggest that to the extent that allocation of blame might be less for the government in this case does not necessarily show that government is better, but tmerely hat it was less involved. The areas in which it was involved (interest rates, Fannie Mae, tax benefits for homeownership—and at least two of those are quite Democratic Party oriented) don’t suggest that the government was allocating resources away from the housing bubble in such a way that we should believe that it was making superior decisions.

Which is not a slam dunk argument against government involvement, the private sphere did a crappy job too! I’m just being an actual conservative and being cautious…

To which I say, huzzah.

Step one of nationalization is to pay what the troubled firms are worth (i.e., including the toxic sludge assets, a negative number).
Step two is to fire all management of those firms and any front line staff who can be shown to have committed fraud.
Step three is to break each of the firms into tiny bits, selling off what is profitable and burying unmourned what isn’t. If leveraged buyouts were such glorious capitalist initiatives for junk bondsmen of the 1980s and 1990s, they should be options worthy of consideration today.

If the firms are too big to fail and too big to manage, they are too big to keep around.

Stodginess is ALWAYS a benefit in banking.