Primer on Bank Nationalisations

Doug Elliott of Brookings has written a nice primer on Bank nationalisation.

Apart from explaining +ves and -ves of bank nationalisations, it also points that US also has a history of bank nationalisations.

Nationalization has been a long-standing part of the repertoire of bank regulators in the U.S., however, it is rarely applied to the largest banks. The most prominent postwar nationalization was that of Continental Illinois in 1984. The bank had been a significant and well-respected competitor for many years when it decided to go for rapid growth in the commercial lending market. It ramped up its effort sharply in the late Seventies and into the Eighties, with the usual result that it found itself with many bad loans

This size led the regulators to conclude that it was indeed “Too Big to Fail,” forcing them to step in with extraordinary aid, rather than simply closing it down, selling off the pieces, and allowing creditors to take losses. In 1984, the FDIC took an 80% stake in Continental Illinois, in exchange for a significant investment and liquidity guarantees. The bank was pushed to bring in new management, split into a good bank and a bad bank, and significantly reduce its size. Jim Swearingen, a well-respected former CEO of Amoco, was appointed to run the bank.

However, exiting was not as easy:

it should be noted that the taxpayers did not manage to completely divest their stake for seven years, in spite of a reasonably healthy banking system and a roaring bull market for most of the period. This, despite the relative simplicity of the bank compared to a modern industry leader. As was noted earlier, Citigroup has approximately 50 times the assets that Continental Illinois did, as well as extensive foreign and investment banking operations.

He also says REsolution trust is not really the answer:

Some have also referenced the RTC in the context of nationalization, since it was owned by the government and its gains and losses flowed through to the taxpayer. However, it must be emphasized that the RTC, which was formed to dispose of the assets of busted savings and loans, was a very different animal than a newly nationalized major bank would be. The RTC did not deal with ongoing operations, but solely focused on selling real estate and other assets taken over from the insolvent thrifts. This was a difficult task, but a very different one from trying to run a going concern.

He also looks at the main lessons of Banking Nationalisations in Sweden (1992) and UK (recent).

A nice look at Banking nationalisations in plain English.

Why Trade is crucial to economic recovery once recession ends?

I was reading this longtime pending paper from Benjamin Olken and Bernjamin Jones. The authors analyse growth and collapses across number of countries. The findings are quite interesting:

In this paper, we demonstrate that growth “miracles” and “failures” appear to be ubiquitous at ten and fifteen year time scales. Only the very richest countries are immune to these dramatic fluctuations. Despite talk of poverty traps, almost all countries in the world have experienced rapid growth lasting a decade or longer, during which they converge towards income levels in the United States. Conversely, nearly all countries have experienced extended periods of abysmal growth. Circumstances or policies that produce ten years of rapid economic growth appear easily reversed, often leaving countries no better off than they were prior to the expansion. The basic challenge in poor countries thus appears to center less on triggering growth and more on sustaining it.

Given the dramatic changes in growth regimes, we further establish several facts about these transitions. We find that growth accelerations are little associated with capital accumulation and strongly associated with increased international trade. Growth collapses meanwhile are strongly associated with monetary instability and, in some cases, the outbreak of civil war. Thus, accelerations and collapses are asymmetric events, and the problem of sustaining growth thus appears different in kind from the problem of triggering economic expansion.

Interesting. The Growth accelerations are dependent mainly on international trade. Another reason why we need to ensure the protectionism does not rise. The policymakers should ensure international trade does not collapse.

Assorted Links

1. MR points survey of econ bloggers

2. WSJ Blog points to an interesting development at G-20 meeting. Mexico is asking IMF for a credit line. And the reason is not because Mexico is in trouble!

3. Rodrik says globalisation has been there for far too long and this crisis will not derail it

4. FCB on US rising debt and how it would effect retirement finances

5. JRV says EMH is still true

6. ACB on Cash for Clunkers scheme