NEW YORK – A call to utilize the current global economic crisis as a panic in which governments worldwide can move to nationalize banks is emerging from the 2009 World Economic Forum in Davos, Switzerland.
The forum’s founder, Klaus Schwab, told CNN yesterday the current global economic slowdown is a “transformational crisis” that should be utilized to shape a “new world.”
“Above all else this is a crisis of confidence,” Schwab said. “To restore confidence you have to establish signposts that the world after the crisis will be different. We have to create a new world and that is what Davos 2009 will be all about – serving society.”
Speaking from the Davos conference yesterday, Nouriel Roubini, New York University professor at the Stern School of Business, told CNBC the global banking system is “effectively insolvent.”
Roubini estimated that the worldwide crisis in bad bank assets will extend far beyond the Collateralized Mortgage Obligation problem caused by subprime loans. He expects the crisis to include bad loans in consumer credit cards, car loans and student loans, as well as commercial loans that have been packaged into securities sold as assets to banks and brokerage firms.
Roubini estimated the bad asset crisis would amount to $3.6 trillion, about half of which he believes will be held by U.S. banks and brokerage firms.
Roubini called on the Obama administration to employ the “Swedish solution,” in which the U.S. government would nationalize troubled banks, not just investing bailout cash but also taking over and giving management control to U.S. government bureaucrats.
Roubini, a frequent guest on financial cable news shows, is known as “Dr. Doom” for his typically gloomy but often accurate forecasts.
In the early 1990s, Sweden nationalized banks but only after the banks had written down their own troubled losses.
Economists Christopher Wood argued in an influential Financial Times op-ed piece that the U.S. Troubled Assets Relief Program, or TARP, has failed to follow the Swedish model, in that the U.S. government has poured $700 billion of bailout into banks and brokerage firms without requiring the banks first to write down their bad assets and without the government taking majority control.
Joseph Stiglitz, a Colombia University professor and 2001 Nobel economics laureate who advised the incoming Obama administration during the transition, echoed Roubini’s concerns in a CNBC interview from the Davos conference.
Stiglitz fears the U.S. Treasury and the Federal Reserve have used TARP funds to overpay for bad assets.
“The private sector would not touch these bad assets with a 10-foot pole,” Stiglitz said. “It’s not clear we have here a good deal for the taxpayers.”
Arguing that “taxpayers have provided capital but have received no control,” Stiglitz also contended the U.S. government should begin nationalizing the banks under the Swedish plan in which the private owners of the banks would first take the losses for bad assets, and the government would nationalize the banks at a much lower share price.
Stiglitz reasoned economic incentives dictated that private bank managers – if left in place after injecting TARP funds without government control – would “have incentives to pay themselves bonuses, to pay shareholders dividends and to use bailout funds to make acquisitions.”
“We need to run these banks for our interest,” Stiglitz said, arguing the Obama administration should move to nationalize banks.
“The government could not do worse than the banks themselves have done,” he observed, insisting TARP bailouts made no sense unless the government ended up controlling the banks.
“You can call it ‘conserving the banks,’ if you want to use a nice term,” Stiglitz said.
“But right now the government is paying too much for bad bank assets and ending up with no real control,” he said. “It’s not clear it’s a good deal for the taxpayers.”