Why does bank nationalization scare Obama?

The White House seems to think that a bank takeover would be "politically explosive." Wrong. Continuing the status quo is far more dangerous.

Published April 20, 2009 2:51PM (EDT)

The New York Times' Edmund Andrews had a busy weekend, publishing two stories on Monday that fit together like pieces in a jigsaw puzzle readers probably didn't want to put together.

First, Andrews tells us that the the Treasury is considering boosting the capital reserves of banks by converting exiting loans into common stock. This will allow the goverment to "shore up the nation's banking system without having to ask Congress for more money any time soon, according to administration officials." It will also increase direct government control over the banks.

Yay. However, in another article, Andrews looks at the performance of the three AIG trustees who are responsible for voting the government's shares in the busted insurance company. Short summary: They suck. They've been invisible, and appear to be exerting next to no authority over the company. They did not make a public peep during the entire bonus scandal.

Boo. The impotence of the AIG trustees raises obvious questions about what the government will do with its increased stakes in the banks, should it proceed with the plan to convert loans into stock.

But what struck me about both articles was Andrews' direct assertion that any increase in government control would be a step toward bank nationalization, which the White House is avoiding because the prospect is "politically explosive."

For example:

In any other country, such moves would add up to at least a partial nationalization of major financial institutions. But nationalization remains so politically explosive in the United States that President Obama and his top advisers are straining to avoid the slightest hint of it.

Is this true? As I watch coverage of the right-wing populist tea-party rage, or read left-wing fulminations about breaking the back of the banking oligarchy, what I see is that continued bailouts of major financial institutions is sure to incite political explosions. Increasing the government ownership stake in the banks without doing anything with that controlling power is guaranteed to be politically explosive. Both the left and the right are making essentially the same argument: We want our pound of flesh. The right says it wants to see failing institutions go bankrupt. The left wants a government takeover, with executives ousted. No one wants to continue the status quo, except the government.

We've been offered a reason. President Obama said last week that nationalization would be more costly to the taxpayer than figuring out another way to stabilize the banking system. I think it's undoubtedly true that simply letting Citigroup fail could be disastrous to the health of the overall economy. Likewise, I also think that nationalizing Citigroup is a much bigger job than most bank nationalization advocates are willing to admit.

But would Congress and the American people really rise up in a righteous rage, if the president addressed the country next week and told us that the stress tests had revealed that Citigroup was insolvent, and he had thus been forced to the point of nationalizing it? I think that's a misreading of the political situation. I don't think there would be anger. I think there'd be relief.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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