Saturday, January 24, 2009

Felix Salmon asks the question: is nationlisation contagious?

The answer to that is YES if it is done without giving existing capital holders the belief that they are being treated fairly.  (See Felix's post here.)  

A bank that loses access to capital eventually fails.  Certainly in a current account deficit country if it loses access to intermediate funding it fails - and intermediate funders are not that keen if the bank has no access to capital.

If private shareholders feel that government will ride roughshod over their rights then there will be no private shareholders.  They will have "fear of government".

So there must be a process which respects the capital that private shareholders offer - and which is seen to honour that capital.  

If done that way - and the Scandinavian countries groped towards such a solution, then nationalisation is NOT contagious.  

As noted in my last post Svenska Handelsbanken did not surrender ANY equity to the government even though it took government liquidity support.  It was seen to have capital and the shareholder capital was respected.

There was - and the histories referred to in my last post - a contagion until the due process was implemented an no contagion afterwards.

I have no objection at all to nationalisation - but it must be accompanied by a process that both respects and is seen to respect existing capital holders.

Can we please get this straight?  Contagious nationalisation - and that is where Willem Buiter et al are heading - is a disaster.  It is also an simply not necessary.



John Hempton

PS.  Notwithstanding the above - a pretty-close-to-complete nationalisation will probably happen in the UK.  Due process will lead us there.

6 comments:

Don said...

To the extent that I own stocks, I wouldn't sell them or stop buying them if the government, in a national emergency, takes over some banks, and some stock-holders get burned. After all, without the government guarantees, they might be burned already. I agree that the process should be seen to be fair, but your worry puzzles me.

On the other hand, I worry about the reaction of taxpayers if it comes to be believed that the assets of stock-holders, who didn't take enough interest in their investments to vote out buffoons, are made viable at the taxpayer's expense. Their reaction seems more bothersome to me.

Stock-holders of the nationalized banks can console themselves with the thought that, just like the rest of us taxpayers, they are part owners of the banks that are nationalized. Surely that provides some solace.

Don the libertarian Democrat

John Haskell said...

Don- as a "libertarian Democrat" oxymorons and contradictions are obviously your stock in trade.

Take a look at recent trading activity in Barclay's Bank. There shareholders of a more practical cast have taken action to protect what little they have left- by selling, driving the stock down dramatically. "Libertarian Democrats" and other woolly headed "buy and holders" are getting trampled in the stampede.

Your observation that you wouldn't sell in the face of imminent nationalization is your personal tragedy, not a basis for rational public policy.

Don said...

John,

I wasn't clear. I didn't mean financial stocks. My point was that I wouldn't sell Walmart stock because of the banks being nationalized. I don't understand how some financial stocks being blown up translates to people in general being afraid to invest in other areas. There might be good reasons to buy or sell Walmart stock, but fear of nationalization isn't one of them. Perhaps I'm misunderstanding you? Maybe you were just talking about financial stocks going forward.

Don the libertarian Democrat

Don said...

John Hempton, I meant to say that I was responding to John Haskell. I've been dividing my writing time on my computer this morning. On a personal note, I have to admit that I do love paradox. Raymond Smullyan and Martin Gardner are two of my favorite writers. I was an undergraduate and graduate student in philosophy, logic, and linguistics. I'm probably one of the few people who read the non-economic writings of Smith, Jevons, and Keynes, before reading their economic writings, although that was a million years ago. However, I would submit that understanding the role of paradox in human thought and agency is crucial to understanding any of their writings. Since graduate school, the study of Talmud has been my main interest, as well as studying languages.
As for being a Democrat, I'm very happy with my party, even if they're not always happy with me.

Cheers, and again, sorry for being unclear again, Don the lib Democrat

PS I am an adherent of the Many-Worlds View in physics and Modal Realism. So, being a libertarian Democrat isn't that hard.

Anonymous said...

The situation is simple.

One either wipes out:

1) Shareholders and maybe some of the bank corporate debt holders (in that order)

or

2) Depositors as tax payers (that is, everybody)

Now, banking CAN exist for a little while without private shareholders.

Corp debt holders can take a hair cut.

But IF one undermines the trust in banks and destroys the depositors / tax payers...

Then head for the doors and panic first.

That is how banking works.

I sincerely hope the stupid politicians will not wake the sleeping giant, just because Maserati driving bankers are afraid of the wrath of speculative shareholders.

And yes, all holdings in banks at this stage is highly speculative (at least in the US and the UK).

Anonymous said...

John

Any chance of an australia day look at whats in store for australia?

Any opinions on how rudd and co are doing so far? What may happen in the future?

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