The Fed cannot take over all bank lending operations. Only the government can do this by temporarily transforming private banks into public ones. It can then order the management of these state banks to lend to each other.
Such a transformation (call it a temporary nationalisation) will make it possible to jump start the interbank market and allow the normal flow of credit to be activated. Nationalising the banking system is not the only intervention necessary. There is today a general distrust of private debt. This will force the government to substitute private debt for public debt. The Paulson plan does just that. More Paulson plans will be necessary to put a floor on the price of private debt and to prevent a meltdown.
The temporary nationalisation of the banking system and the substitution of private debt by public debt will allow us to reach a new equilibrium. When this happens, a fundamental reform of the banking system will be necessary in order to remain in this benign equilibrium. When this is achieved the governments will be able to privatise the banking system again.
Friday, October 10, 2008
Financial Times Op-ed: Nationalize the banks
A Financial Times op-ed comes out in favor of a full (temporary) nationalization of our banking system.