On their blogging heads video Noah Scheiber and Megan McArdle seem to agree that Citigroup’s size and complexity were a key problem preventing regulators from nationalizing the bank.
I am not so sure. I think lack of clear regulatory authority to wind Citi down is the real issue. Why?
Because if the Fed has clear authority to do it then it doesn’t have to involve Congress and it is when Congress gets involved that things really go boom. Lots of commentators mention that the government would have to “run Citi.” Well, no not really. Most shareholders don’t take an activist role in running the corporations that they own. The government doesn’t have to either.
The problem with nationalization is not that the government has to run Citi but that the government gets to run Citi if it wants. That is, when you go to Congress to ask for money Congress is now fully aware that they can ask you for favors that benefit their constituents or use you as a whipping boy to pull in more votes.
Cutting Congress out of the loop is key and it would allow the Fed to take care of the problem quietly. Even if it took months, that’s fine as long as creditors know that they will definitely get their money back. Indeed, since the Fed is going to guarantee everyone anyway and since they have the printing press they could simply cash out the short term creditors much the way the FDIC cashes out depositors. With this structure a failing Citigroup is much less of systemic problem.
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Saturday ~ June 27th, 2009 at 2:20 pm
Can better regulation survive a George Bush & his appointees? « Entitled to an Opinion
[...] June 27, 2009 Can better regulation survive a George Bush & his appointees? Posted by teageegeepea under Uncategorized Leave a Comment William Black makes a point I’ve often tried to make to liberals. Of course his solution is just to ban certain kinds of market transactions. I’m reminded of an old post at Post-Austrian Economics (unfortunately removed from the web) where a sort of public-choice challenge was made to Paul Davidson over how the government could expect to handle such complexities and unexpected events in markets, and I think his conclusion was similar. Black also seems to agree with Sailer on “too-big-to-fail“. Megan McArdle & Noam Scheiber distinguish between the hazards of size & complexity/interconnectedness here, and Karl Smith chides them on the difficulty of dismantling failed banks here. [...]