Barton Biggs described the stock market as a “mean and sadistic beast” and recent activity has proven him right. Rumors and speculation of bank nationalization have driven stocks of such household names as BankAmerica and Citigroup to under $10. The question of the day is “will the banks be nationalized?” In the last thirty days the Obama administration has committed $3 trillion dollars to restoring economic health. To take over the banks would bloat the US balance sheet even more.
It is hard to know what this administration will do or have to do. Timothy Geithner’s well telegraphed plan for reforming the banks and solving the crisis turned out to be no more than a concept which drove the markets down 5% the day he spoke and he hasn’t been seen nor heard from since. Ben Bernanke said “we will keep the banks private, or return them to private hands, as soon as possible. Christopher Dodd topped this by saying “we don’t want to nationalize the banks, but it may happen”. The White House did say last that we “will continue to have a private banking system going forward”. Reading between the lines is crazy making. Until we see a concrete plan we can trust we don’t know what they’re up to. Banks such as Citibank are partially nationalized now and may need more help if the economy doesn’t recover.
What will happen? What matters isn’t just what got us here but what we’ve learned and what happens going forward. The current administration is making decisions and executing plans that will have far reaching implications. The trillions of dollars thrown at the problem won’t solve the basic issues unless confidence is restored and the job market is healthy. The bail out funds given to companies will be a waste of money unless customers want loans and US manufactured cars are in demand. Talk of nationalizing our banking system further destroys our confidence in the institutions and makes their recovery even more tentative. If we limit pay for executives of banks that take government funds then we are dooming these financial institutions to mediocrity. We need talented managers going forward to get us out of this mess. Shareholders, not the government, should dictate pay.
Can our country bear the consequences of these massive government programs and resulting debt? We have not touched the ailing Social Security and Medicare programs. The stimulus plans will probably work in the short run to restore economic activity and for awhile we will feel better, employment levels will stabilize and the capital markets will recover.
Then what? Taxpayers will be burdened with layers of debt at a time when demographics suggest the largest segment of the population – the baby boomers – will be spending less and utilizing the healthcare system more. The weight of this may be more than our country’s poor shoulders can bear. Stay tuned – the best may be yet to come. We may be compounding the problem, not solving it.