[R-G] Julio Huato Hoping for a Democrat Victory and Bank Nationalization

[Yoshie Furuhashi]

Meanwhile, Julio Huato is hoping that if we could hold off till the
Democrats get to rule both the White House and Congress, we might get
a better deal, perhaps bank nationalization.  I doubt that Obama is
any better, since he is backing the bailout plan anyhow, but is there
any reason we have to rush to approve the bailout _now_ without
haggling more? -- Yoshie

<http://juliohuato.wordpress.com/>

So, here's the thing: In principle, yes, it's better to face now these
risks and try to preempt a deeper and longer recession by passing the
TARP deal as is, or almost as is.  However, in the long run, this
"better" may turn out to be only "marginally better."  Why?  Because
it's likely that, in November, Obama and the Democrats running for
Congress will prevail, which will drastically alter the political
landscape.

Come January (or even November) the Democrats will be in a completely
different position, thus having more clout to shape up expectations in
the economy and, more importantly, to shape the actual bank rescue
deal.  It seems to me that the Democrats in power would be more
willing, especially under active popular pressure, to undertake the
(partial) nationalization of troubled banks, a much better approach
than buying off toxic assets at some above-market arbitrary price in
the hope that 1) the banks are thus re-capitalized and 2) the Treasury
is at some point able to dump them in the market at a decent premium.

Krugman, DeLong, Galbraith, et alia have aptly argued in favor of the
Sweedish approach to rescuing the banks and there's no reason to
belabor that point here.  I could add (a bit vaguely, I admit) that
Mexico's own experience is consistent with their argument.  In 1982,
Mexico nationalized the banking system.  Then, during the Salinas
administration, the banks were sold back to private capitalists.  Even
though the process was corrupt to the core, it seems that Mexico's
treasury didn't do too bad on the deal.  (I'll sound like Palin vis
Couric, but I should get back to ya on this.  Need to look for
references to this, as I'm sure there are studies that show it.  My 3
readers: please help.)

Then, in 1995, as a result of the Tequila crisis, Mexico's private
banks got again in deep trouble.  This time, the government of Ernesto
Zedillo used the National Fund for Savings' Protection (FOBAPROA), an
institution created by Carlos Salinos in the spirit of the FDIC, to
assume the banks' liabilities that resulted from the insolvencies and
bankruptcies following the peso plunge.  Altogether, the FOBAPROA
assumed about 50 billion USD of banks' bad debt, and that debt was
later (in 1998) formalized as part of Mexico's public debt.  Aside
from the outright fraud and corruption involved in FOBAPROA's
operations, duly documented by the political opposition in Mexico, the
deal was not nearly as good from the viewpoint of Mexico's treasury as
the 1982 nationalization.

I wish I could be more specific about the reasons why one approach
worked and the other didn't, but at some point one has to be humble
and admit that ignorance is no valid argument.

Anyway, the main point I wanted to make today is this: Sometimes it's
better to have a good fight than a bad settlement.