Time to Nationalize Insolvent Banks

Nationalizing insolvent banks is, paradoxically, the most market-friendly way to clean up a rotten financial sector. Whereas Sweden adopted this approach successfully during its banking crisis in the early 1990’s, the current US and British approach may end up producing Japanese-style zombie banks – never properly restructured and perpetuating a credit freeze for years.

NEW YORK – A year ago, I predicted that the losses of US financial institutions would reach at least $1 trillion and possibly go as high as $2 trillion. At that time, the consensus among economists and policymakers was that these estimates were exaggerated, because it was believed that sub-prime mortgage losses totaled only about $200 billion.

As I pointed out, with the United States and global economy sliding into a severe recession, bank losses would extend well beyond sub-prime mortgages to include sub-prime, near-prime, and prime mortgages; commercial real estate; credit cards, auto loans, and student loans; industrial and commercial loans; corporate bonds; sovereign bonds and state and local government bonds; and losses on all of the assets that securitized such loans. Indeed, since then, the write-downs by US banks have already passed the $1 trillion mark (my floor estimate of losses), and institutions such as the IMF and Goldman Sachs now predict losses of more than $2 trillion.

But if you think that the $2 trillion figure is already huge, the latest estimates by my research consultancy RGE Monitor suggest that total losses on loans made by US financial firms and the fall in the market value of the assets they hold (things like mortgage-backed securities) will peak at about $3.6 trillion.

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