Monday, July 27, 2009

Banks Are Nationalized Already, Just Not Their Profits

Notice how you don't hear about the need to nationalize banks anymore? I believe the reason is that with the accounting rules changes and the explicit and implicit guarantees of the federal government not to let any systemic institution fail we have achieved bank nationalization without actually nationalizing them. What would be different if the government had actually nationalized them? Only one thing, profits. Currently banks can take as much risk as they want, borrow at next to nothing and lend at high rates and produce profits - all because of government programs - any profits are for the shareholders, any losses will be absorbed by the taxpayers....sound familiar? If this sounds like the old Fannie Mae/Freddie Mac scheme, you'd be on to something.

Our banking system, which is effectively insolvent is backstopped by the government in every sense. Other than profits, they've been nationalized.

Scott Dauenhauer CFP, MSFP, AIF