Nationalizing banks is the best solution to ending the U.S. financial crisis, says the voice of the oldest international organization devoted to investor protection.
Rex Staples, general counsel to the North American Securities Administrators Association, a Washington, D.C.-based voluntary group, said the U.S. should look to Norway’s experience with nationalizing banks.
When Norway realized it was in a credit crunch in the early 1990s, its government acted swiftly and enacted emergency measures that involved nationalizing all banks, he explained. As a result, the country’s central government took a decisive stake in Norway’s banking agencies. All bank executives were fired; the salary and pension of the executives were divested; and all bank equity was either erased or traded in for debt.
According to Richard Nakuma, professor of economics at Vaxjo University in Sweden, “a popular explanation to the [country’s] financial crisis was that the crisis was caused by the financial liberalization during the 1980s.” Nakuma writes that this liberalization was motivated by two specific market elements: the complete removal of limits in lending and the liberalization of capital movements, which made it possible for investors to buy higher-yielding assets, in turn leading to pressure on real estate prices.
These are the same two elements that have driven the U.S. crisis, Staples said. “We are in a solvency crisis, not a liquidity crisis,” said Staples during his keynote speech Monday at the Advisor Group’s 2008 Mutual Fund Dealers Symposium in Collingwood, Ontario.
A liquidity crisis requires an injection of capital — a solution that was tried last year when private equity, in the form of sovereign wealth funds, propped up specific financial institutions with large injections of cash. “No matter how much money you put in, you can’t buy worth.”
The problem is that the Paulson plan, as it currently stands, will free up credit only by recapitalizing the banks; it won’t address the problem in the credit markets — the place where solvency is directly situated.
“It’s the shiny object argument,” said Staples. “A logical fallacy.”
If, however, the U.S. government were to nationalize banks, “the [U.S.] taxpayer would not take a hit, and the bad debts would be cleared up,” said Staples. “The Norwegian government insisted on accurate evaluations and mark-to-market accounting,” and no matter how hard it was, it stuck to this solution; a decade later it is out of the crisis, the economy is strong and it controls one of the world’s largest sovereign wealth funds.
Even if the U.S. never passes legislation to nationalize banks, Staples believes changes could be made to mitigate future problems.
First, he believes all regulators need to stop establishing a system based on reactions to situations.
“Now is the time, if ever there was a time, for reasonable regulators and reasonable industry participants to band together to revise the onerous and nonsensical regulation that is prevalent in this business.”
While regulators will probably not agree with financial institutions, Staples conceded that “at the end of the day, we share one common dilemma: how to produce a functioning active market with fair and equitable laws.”
Second, Staples would like to see a trust-based system established. He says this can be done only through active, engaged dialogue between regulators and financial institutions.
He concedes that regulators can become jaded and fall into “police syndrome,” where you begin to see everyone as bad, but it doesn’t have to be this way.
The final method to mitigate future financial collapse is to ensure no one institute has complete regulatory power, he says. By allowing only one regulator to determine and examine policy and actions in the market, you remove a check-and-balance mechanism that is inherent with multiple regulatory bodies.
“The analogy is that of a police station. The first shift of police officers goes in to investigate and finds nothing. Then the second shift arrives and, with fresh eyes, examines the situation and assesses a problem,” said Staples. By having more than one regulator, we create a system of checks-and-balances; what one misses, another will catch.
“Which brings me back to my point on political incumbents,” said Staples. “They have no incentive to learn or change because it doesn’t matter. No matter what the outcome is, insofar as their constituent base, it’s only about getting elected.”
Originally published on Advisor.ca on September 30, 2008