Would bank nationalization have made a difference?

In November Americans will vote in Congressional elections that will probably deliver a major rebuff to the Democrats. Is there any way the Democrats could have prevented this outcome? From an Australian viewpoint the American discussion of Congressional elections is curious as relatively little attention is given to overall voting intention, it is true that personalities count for a great deal and there are strong Republican areas represented by Democrats and vice versa but overall the generic vote is a reasonable predictor and it points to swing of more than 6% against the Democrats. Leading Democrats such as White House press secretary Robert Gibbs admit the Republicans could secure a majority. Former Clinton advisor William Galston anticipates Speaker Boehner. There is a general climate of pessimism among the electorate although combined with a negative evaluation of the Republican legacy (and the Democrats cling to this as a campaign tool).  One months better economic news could improve the position but still time is running out.

There is an ongoing debate about whether Obama could have done better, well address from a pro-Obama position by Jonathan Chair here and Erza Klein here. They point to the economy. It is a convincing argument but one major qualification is the issue of public response to the financial crisis, according to Pew:

Only about a third of Americans (34%) know that the government’s bailout of banks and financial institutions was enacted under the Bush administration. Nearly half (47%) incorrectly say that the Troubled Asset Relief Program – widely known as TARP – was signed into law by President Obama.

TARP has been unpopular and a central theme of critics of the administration. Would bank nationalisation have been more popular? It is difficult to imagine it being less popular.

James Galbraith:

When the crisis went public in August 2007, Henry Paulson’s Treasury took every step to prevent the final collapse from happening before the 2008 elections, extracting billions from the Federal Housing Authority and from Fannie Mae and Freddie Mac to relieve the pressure on bank balance sheets. It worked until it didn’t. In September 2008 the collapse of Lehman triggered the collapse of American International Group (AIG) and the steps that led to the Troubled Assets Relief Program (TARP) and to the effective nationalization of the commercial paper market, meaning that the Federal Reserve has become the primary short-term funder of major American corporations. Upon taking office, President Obama had a chance to change course and didn’t take it. By seizing the largest problem banks, the government could have achieved clean audits, replaced top management, cured destructive compensation practices, shrunk a bloated industry, and cut the banks’ lobbying power and therefore their capacity to obstruct financial reform. The way to write-downs of bad mortgage debt and therefore to financial recovery would have been opened. None of this happened. Instead the Treasury administered fake “stress tests” and relaxed mark-to-market accounting rules for toxic assets which permitted the banks to defer losses and to continue to carry trash on their books at inflated values. This reassured the banks that they would not be permitted to fail—and so back to bonuses-as-usual they went. The banks survived, and the administration today claims this “proves” they didn’t need to be taken over. But to what end did they survive? The banks are bigger, more powerful, and more obstructionist than ever—and largely uninterested in making new commercial, industrial, or residential loans. Today the former middle class is largely ruined: upside down on its mortgages and unable to add to its debts. With housing prices low and falling, banks are delaying foreclosures because they don’t wish to recognize their losses; it is a sick fact that the cash homeowners conserve by non-payment is one source of the anemic recovery so far. But construction remains depressed, state and local budgets continue in a death-spiral of spending cuts and tax increases, the stimulus will soon end, and exports may soon fall victim to international austerity and the rapidly declining euro. Meanwhile the deficit hysterics seem determined to block unemployment insurance and aid to states today, and to cut Social Security and Medicare tomorrow…The first step toward health is realism. We must first stop pretending that bad assets can be made good, that bad loans will someday be repaid, and that bad people can run good banks. Debt crises are resolved when debts are written down and gotten rid of, when the institutions that peddled bad debts are restructured and reformed, and when the people who ran the great scams have been removed. Only then will private credit start to come back, but even then the result of bank reform is more prudent banks, by definition more conservative than what we’ve had. So yesterday’s borrow-like-there’s-no-tomorrow America is done for in any event; there will not be another bank-sponsored private credit boom. The housing crisis (and therefore the middle-class insolvency) won’t go away soon. There is no cure for falling housing prices except time and patience; debt relief will at best stabilize the middle class. It follows that the private banks and dealers and borrowing by households are not going to be at the center of the next expansion. We are in the post-financial-crash. We need to do what the U.S. did during the New Deal, and what France, Japan, Korea, and almost every other successful case of post-crash (or postwar) reconstruction did when necessary. That is, we need to create new, policy-focused financial institutions like the Reconstruction Finance Corporation to take over the role that the banks and capital markets have abandoned. Thus, as part of the reconstruction of the system, we need a national infrastructure bank, an energy-and-environment bank, a new Home Owners Loan Corporation, and a Gulf Coast Reconstruction Authority modeled on the Tennessee Valley Authority. …The entire host of neglected priorities of the past 30 years should be on the agenda now. That is the way—and the effective path—toward prosperity.

The political consequences of TARP seem to be a neglected argument for nationalization, on whose general non-political aspects Joshua Gans is interesting. Conservative Christopher Caudwell notes the extent to which TARP has worked against the Democrats and argues:

But are the banks in fact too big to fail? Not necessarily. The banks are certainly too big to fail without destroying the economy. But that is not the same as saying they are too big to fail. The first duty of a sovereign public is to defend its sovereignty, not to prop up its banking system. The public is in a mood to risk cutting off its nose to spite its face. If voters are again offered a choice between bailouts and a likely second Great Depression, it is by no means certain they will choose the bailouts.

He may be correct that recent policy choices have constrained what may be possible in the future (an insight of the American Political Development school) or as Marx put it:

Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. The tradition of all dead generations weighs like a nightmare on the brains of the living.

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