Nationalizing U.S. banks would not solve economic crisis

WASHINGTON — Some big guns on the right have joined the left in calling for the temporary nationalization of America's troubled banks. Among them are former Fed Chairman Alan Greenspan, Republican Sen. Lindsey Graham, consultant and professor Nouriel Roubini and former Treasury Secretary James Baker.

They are wrong: Nationalization would compound the problems caused by the credit craze that led us to where we are, kick taxpayers in the stomach, and do in a convoluted way what the market would do swiftly.

The banking system is in a humongous mess. Potential losses by U.S. banks on loans and securities amount to nearly $2 trillion. The response by two consecutive administrations — government-funded loans, capital injections and guarantees — has not inspired confidence. The markets know that the banks are concealing the value of their bad assets by not selling them at the low prices investors would offer.

The reason for not letting Citigroup, Bank of America, Wells Fargo and others go down is, we are told, that credit needs to keep flowing in order to avoid a depression. But that reasoning is backward. Credit is not the father but the child of economic prosperity. Garet Garrett, the intellectual giant of the 1930s, put it like this in "A Bubble That Broke the World," his classic on the credit craze that led to the Great Depression: "From the beginning of economic thought it had been supposed that prosperity was from the increase and exchange of wealth, and credit was its product."

It is common knowledge that for years, Americans have lived beyond their means by saving too little and borrowing too much. If this is readily accepted, why is it so difficult to see that a government-induced expansion of credit at a time when American households are finally trying to pay back their debts and save for the future will only prolong the problem?

In January alone, the annual rate of saving in the U.S. was the highest since monthly records began in 1959. That should be a reason to rejoice. Of course, businesses need credit and customers. But there are two ways to get them. One is by bailing out and then nationalizing the banks — and paying a catastrophic price. The other is by letting the financial system purge itself of failed assets and giving consumers a bit of time to replenish their coffers.