Thursday, January 22, 2009

Is Bank Nationalization a solution to reviving banks from the current crisis?

Nationalization of banks equates to government running banks. The fundamental question is a solution to the current banking crisis? The answer is "no" and "yes".

Should the government be in the business to run the business? No. Not in a capitalist system. But, the if banks keep falling at the rate they have in 2008 and in January 2009, then it should the last resort. Even if Government can nationalize banks, it is complex to nationalize all the banks. It is only practical to nationalize handful of big banks. Then, if the banks were nationalized, branches will be closed, competition will diminish and service will suffer.

Government has other means to revive banking systems before a drastic step like nationalization take place.

The fundamental problem gripping banks is the falling value of assets; especially, the structure securities. If the first tranche of TARP were used to purchase such assets and the assets were removed from the banks' balance sheets, the problem could have been ameliorated. The new administration has requested for the second half of TARP. It is floating the idea of accountability and transparency as well as requiring banks to lend. Hopefully, the new administration will be able to implement such measures.

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