The Riot Trail: torches and pitchforks

We’ve somehow managed to construct something of a post-shame society, in which elites have convinced themselves that the rational agent model of human behavior is not just a useful modeling tool, but an ethical guidebook. There’s something to be said for the idea of a sense of honor and personal responsibility.

That this point even needs to be made is a sad in itself.

Kevin Drum says that if nationalizing the banks sounds bad, all the alternatives are worse:

And in truth, nationalization is more than the least worst option: It actually has a lot of benefits. It allows rapid reorganization and write-down of debts without the associated chaos of a bank failure. It wipes out shareholders and forces creditors to take a haircut, just as in a normal bankruptcy. And unlike endless capital injections in return for small stakes, it's a fair option for American taxpayers, who deserve to own more than just a minority share if they're investing more than the bank is worth in the first place.

Nationalization also solves the problem of valuing toxic assets: The government can simply sit on the stuff until the market turns up and then sell it off for the best price it can get. There's no need to immediately value it at all. Most important, with the full faith and credit of the United States government behind them, nationalized banks can be recapitalized and made into functional credit providers again. And as soon as they're back on their feet, they can be sold back to the private sector, as happened in Sweden. Taxpayers will still lose a lot of money on the deal—there's really no way of avoiding that at this point—but nationalization keeps those losses lower than any of the alternatives.

And there's one more thing about nationalization to keep in mind: We already do it all the time. The FDIC now takes over small banks every week, and among bigger institutions the government has already effectively nationalized Fannie Mae, Freddie Mac, and insurance giant AIG. And for the most part, life goes on as usual. If Citigroup or Bank of America were taken over, the board of directors would be dissolved, some of the senior staff would be replaced, shareholders and bondholders would take a hit, and the bank would continue running as normal except with a stronger capital base and government guarantees behind it. Then, in a few years, it would be refloated and put back in private hands. It's not as scary as it sounds.

As finance blogger Steve Waldman has put it, "real capitalists nationalize." The fundamental principle of a free market system is that ownership and control of failed enterprises should reside in the hands of whoever buys up the corpse. If that's the government, then that means nationalization. This may be why temporary nationalization has won the support not just of mainstream economists like Nouriel Roubini and Paul Krugman, but of no less a free market acolyte than former Fed chairman Alan Greenspan. "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," he told the Financial Times in February. "I understand that once in a hundred years this is what you do."

Obama introduces his budget:

Jefferson Morley has a great short analysis on the politics of passing Obama's budget and the outlook on bipartisanship.

Some cool portraits of Michelle O