Woah. Big news from the NYT: U.S. May Take Ownership Stake in Banks
Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.
Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks' balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.The Treasury plan, while still in preliminary stages, resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.
All of the economists that I really trust have from the very beginning been calling for this, so its nice to see the Fed and the Treasury coming around so quickly. I can't help but wonder: did they change their mind, or have they been considering something like this all along?
If this does happen, we will be able to say in all seriousness that a conservative Republican administration brought socialism to the US financial services sector. Surreal... but nice!
Or as Atrios just put it: "Only Nixon could go to China. Only Bush can finally bring the Marxist Revolution home!"
UPDATE: Ezra adds something important with this:
Most observers believed that so long as Bush was in office, the asset purchasing power would be used, and the equity provision was included because a future Democrat might want it, and the Democratic base would have howled if the legislation hadn't included it. But as Justin Fox says, in the last two days, Bernanke and Paulson have both hinted that they're going to begin using that authority. Paulson was particularly blunt: "The [bill] empowers Treasury to use up to $700 billion to inject capital into financial institutions, to purchase or insure mortgage assets, and to purchase any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability." You'll notice injections of capital came first. Asset buys came last. A few moments later, he underscored the point: "We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size."
Which suggests they're not only coming around to the view of Krugman, Galbraith, and others, but trying to telegraph the epiphany in order to increase investor confidence. The message is simple: We get it. Buying up assets isn't enough. We're going to have to start buying companies, because the US government is the only institution that has confidence from investors and is in a position to back these banks. And if you want even more evidence of how rapidly the ground is shifting, even The Wall Street Journal is arguing for nationalization. "Now might be a good time to take Treasury Secretary Hank Paulson's new powers out for a spin," they wrote. As Steve Waldman puts it in an excellent post, we're in a moment when the truly capitalist thing to do is nationalize. In times of crisis, solutions that once seemed radical become simply pragmatic.
