Many Democrats and even some prominent Republicans are calling for the federal government to nationalize major U.S. banks in order to control the current economic tailspin. Nothing scares bankers or shareholders more, and rightfully so.
Nationalization causes detrimental turmoil to the financial markets.
Banks are dealing with losses caused by widespread loan defaults. The only way the government can hope to relieve banks of these losses is by injecting capital into the banks, which the government is already doing. These losses won’t magically go away with a federal takeover.
Shareholders’ stocks would become worthless if the government took over the banks. There would be absolutely no way for investors to regain previous losses.
In addition, even one federal takeover of a bank could ignite a financial wildfire. Shares across the entire banking sector would continue to fall, and trust in financial institutions would be devastated. Any bank that the government takes control of would suddenly become the safest bank, and people will move their money out of their not-so-safe banks making existing problems worse.
Those in favor of nationalization often cite the success of the Swedish government’s nationalization efforts in the last decade. This is basically irrelevant in that Sweden’s entire banking system represents a small percent of major banks in the U.S. The financial challenges in America are complex and are decades in their making. Letting the government control major banks won’t suddenly change anything.
Given the severity of the consequences that could result from nationalization, this must be considered a last resort. The Obama administration should stand by our banking system and assure the market that bank nationalization is off the table.
Tyler Zodrow is freshman finance major from McKinney.