Don't Nationalize Our Banks

Don't Nationalize Our Banks



By INVESTOR'S BUSINESS DAILY | Posted Tuesday, February 24, 2009 4:20 PM PT

Banking: The federal government may be getting ready to nationalize one or more of America's major banks. The reason often cited for taking such drastic action is "systemic risk." Are our banks really in such dire shape?

You might be surprised to discover that the answer is no.

Yes, some banks are struggling right now with big losses on real estate and their securitized loan investment portfolios. But roughly 90% of America's banks are in decent shape.

But you don't have to take our word for it.

As the chart in the next column shows, overall lending at U.S. commercial banks was up 5.7% in January from last year to $9.85 trillion, a record. Since 1990, average annualized monthly lending growth has been 7.3%. In other words, we're just below normal.

Commercial and industrial loans, a key gauge of business access to credit, were up 8.4% in January — though down from the roaring 20%-plus growth rate of early last year. Consumer loans rose 10.1%.

In short, bank lending is at record levels. That's a data-based fact.

So why all the talk of nationalization? Especially after reading what the U.S. banking system's five regulatory agencies — the U.S. Treasury, the Federal Deposit Insurance Corp., the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve — had to say after they met on Monday.

It got little attention at the time, but it sure turned our heads. Down at the bottom of the regulators' release came this revealing statement: "Currently, the major banking institutions have capital in excess of the amounts required to be considered well-capitalized."

Get that? The major banks have enough capital to be considered "well-capitalized." And as the data above indicate, they're lending.

So why all the talk of crisis? Why the threats to nationalize? Why are we force-feeding banks like foie gras geese with $1 trillion in taxpayer-funded capital when many, if not most, don't need it?

This, by the way, is completely contrary to the image we've received from both the media and the administration that somehow we're on the edge of a banking Armageddon. We aren't.

One reason we're in better shape than we thought is that last year the Federal Reserve moved quickly to make sure banks had enough liquidity, injecting hundreds of billions of dollars into the system and cutting interest rates to stimulate loan demand.

Yes, banks have become more selective. But people feel that things are worse than they are because they judge the current strict lending environment against the excessively lax one of just a few years ago.

It might be argued that banks are now doing what they should have been doing all along. So why all the panic?

As economist Alan Reynolds of the Cato Institute recently noted, until very recently as much as 80% of all nonfinancial corporate lending took place outside of the traditional banking system. A lot of that lending capacity has been damaged in recent years as these nonbank lenders — hedge funds, the commercial paper market, the bond market — got swept aside by the gale-force winds of the post-housing-meltdown economy.

Meanwhile, the traditional banks, while by no means enjoying robust health, are mostly sound. Yet, under the government's Capital Assistance Program, it's quite possible that the government will find certain banks "too big to fail" and try to take them over — or nationalize them, as it were.

This would not be wise. If a bank is burdened with a fatal dose of bad loans on its balance sheet, it might actually be the best thing for our economy in the long run to let it close and sell off its assets.

Better a dead bank than a zombie bank that comes back to life, selling assets on the cheap and endangering the health of other financial institutions.

One thing should be clear: Nationalization has been posed as a solution to a nonexistent problem. With markets plunging in recent weeks amid such talk, we were glad to hear the banking regulators also announce Monday that "banks should remain in private hands." We only wish Congress would get the same message.

We're in a recession, but the banks didn't cause it. A collapsing housing market did. Nationalizing the banks won't help.

Based on history, we should be climbing out of this recession very soon. But whenever we do, we'll come out of it a lot better with a healthy, private banking system — not a nationalized one.