Many analysts begin their comments on nationalizing the banks with the "fashionable" term "zombie banks," suggesting that there are banks out there lurking in the cold canyons of the cities that are really quite dead. Zombie banks pretend to be solvent, but refuse credit-worthy companies and individuals reasonable loans, and thus cause more harm than if we as a nation were to put a stake through their dark hearts. The more subtle implication is that there are non-zombie banks that should not be nationalized because they are lending and conducting business just as if there were no depression and the GDP had leveled off just above zero growth rather than plunging to minus 6.2% growth in the 4th quarter of 2008. If there were such banks, they would be inundated with pleas for help from every golden opportunity in America and probably the world, and under that pressure would noisily collapse. The curious fact is that the small regional and local banks snorkeling along right now are incapable of meeting demand, so they are not even attempting to. The ugly fact is that large banks like BofA and Citi and Wells and Morgan-Chase are so weak that the only thing giving them the appearance of survival is the four-word phrase "too large to fail." For all practical purposes they are insolvent, and insolvency presents several problems for the FDIC and the Federal Reserve that go well beyond deposits and loans to capitalization and investment. So, the time has come to move boldly to go beyond the grizzly details of these banks' failures with a larger more important truth. Banks are public utilities! Banks are public utilities, performing a public service that is not just handy for the national economy, but an indisputably essential "public good." Since 1913 we have understood banks in this way and have given them license to operate for that purpose. When banks do not perform this "public good," they are no longer living up to their charters and responsibilities. Banks are utility companies and it really does not matter whether they, like electric or water or sewer utilities, are publicly held or privately held or are cooperatives. In fact it does not matter really, except in one very important matter, whether in the modern world they, like utilities, have geographic monopolies. In the age of internet banking, internet credit, transnational banking corporations, the fact that a bank physically sits there in Sarasota or Saratoga Springs and cares for the money of a congregation of wealthy people is practically irrelevant. In short order this bank is confronted with non-local competition and forced either to compete for deposits or die. The really important matter that suggests that banks not be de facto or even de jour monopolies is that bankers are incredibly fallible and yet incredibly full of themselves! But, as we have agreed, banks are essentially utilities pumping excess capital accumulation into productive use at interest rates that are highly refined mechanisms for calibrating risk. Or at least banks were about deposits and loans and capitalization until banks (following the lead of J.P.Morgan-Chase) got into the business of credit default swaps and buying securities containing tranches of dubious value in a high-speed, entropic markets. Banks that are too conservative do not make the right number and amount of loans; their profitability declines and the boards of directors complains that the loan officers are too conservative. The conservative loan officers are fired and less risk-averse loan officers replace them until these new-comers make too many high risk loans and the losses begin to overtake the profits from lending. Eventually successful banks find the right people and do well. Banks are training camps for loan officers, with a few senior loan folk setting examples for the many junior loan officers where the high volume is. The bank with which I was once associated made some really bad loans for motion pictures based on some really faulty reasoning and then made some really bad foreign loans at the request of non-banking politicians associated with the guy who used to be governor of California and then became President of the United States. As a result the one-time 8th largest bank in the country and 12th largest in the world failed after nearly 100 years of service. it was not the fault of junior loan officers; it was the big wigs down at head office. Right now loan officers all over the country are being trained to not make loans to companies and to individuals because the senior loan folk who got their banks into this mess are afraid that none of the companies and individuals have sufficient likelihood of repaying, given that the economy is spiraling downward and soon will catch even the gold-plated companies and individuals unaware and sink them, too ... along with the bank's loaned out money. The problem is that having screwed up royally, these bank executives believe they must now prove themselves to be financially responsible. Sorry, Charlie! You had your chance and you blew it. The way out of the spiral is to restore confidence: confidence among investors, so that banks can recapitalize; confidence among loan officers, so that they can make and manage portfolios of reasonable loans; and confidence among borrowers that the banks will not undercut their opportunities by refusing loans to their suppliers, contractors, customers, and other personal business relationships! There is only one way to achieve all three levels and sectors of confidence simultaneously—that is to nationalize all banks. The Federal Reserve and the FDIC already know intimately which ones are the problems. They will deal with each back on an individual basis, sometimes selling off one bank to another, sometimes leaving staff in place, but urging them back to natural lending. Nationalization will make it possible to fire the bank executives who brought on this mess and who are over-reacting and mis-training their junior loan officers. "Nationalization" of the capitalization of the banks means showing the good faith and credit of the world's richest nation as these banks' (temporary) assets, thus luring private capital back into the banks to replace public funds. And, finally, to show the public at large that confidence in the banking utilities is warranted, thus to get them to invest in production and jobs, which in turn provides the wherewithall for consumption of goods and services. Nationalization carries with it in the current culture a fear factor stoked by the Republican Party as creeping (or galloping) socialism. When that hocus-pokus fails to meet the test of common sense, since banks are already public utilities, Republicans (and some others) complain that anything managed by government is managed poorly. There is a self-fulfilling prophecy attached to this idea when Republicans are in charge, for they have sabotaged more than one federal program while in power. Republicans are not in power now, and although they will never be confident that Democrats can run federal programs efficiently, the point is to run them wisely and effectively! So, yes we can! People need not worry about socialism in this country. We have a mixed economy already and the so-called "socialist" elements, that is, the employment and services provided by federal, state, and local governments is already gratefully accepted by the people at large. The largest department of the federal government, DoD, is one such "socialist" element. Amtrak, Medicare, NPR, CPB, public libraries, the Post Office, public education K-12 and higher education, are all state-run enterprises that are integral to the functioning of our society. In some areas, however, as mentioned earlier, competition is the answer to individual ineptitude and arrogance. Banking is one of those industries where assembling the right balance of risk-takers to conservators is essential. It can be done by establishing doctrines, but managing the balance of personnel is a daily task best done on the ground by persons with a personal stake in the outcome. Managing the managers is what federal regulations are all about, and we all know by now that regulations are essential. The point of nationalizing banks as soon as possible is to establish confidence, not to establish regulations or to achieve public ownership. Regulations will be re-established on management, allowing them sufficient leeway to be enterprising without being dangerous (again) to the industry and the society at large. The sooner we nationalize the banks the sooner we will be able to de-nationalize them, having removed the dangerous elements that threaten the individual institutions and the greater society. JB
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