# The pros and cons of nationalisation



## canicemcavoy (1 Sep 2009)

_Moderator's note: moved from the thread on Fine Gael's proposal_

If AIB and BOI are of systemic importance, they should be nationalised. 

If they aren't of systemic importance, they should be left private and treated like any other private firm.

It doesn't seem to me to be tenable to have private firms in a position where, knowing they are "too big to fail", they can continue to essentially blackmail the country into bankrolling them, knowing they can be reckless in the quest for profits during booms, then fall back to begging-bowl mode during the inevitable crash.


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## Duke of Marmalade (1 Sep 2009)

*Re: The Fine Gael alternative to NAMA*



canicemcavoy said:


> If AIB and BOI are of systemic importance, they should be nationalised.
> 
> If they aren't of systemic importance, they should be left private and treated like any other private firm.


A logical argument but in practice there are big negatives in nationalisation which IMHO justify keeping the current paradoxical model. But it should (and will) be much more heavily regulated (reflecting the effective State guarantee).


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## Complainer (1 Sep 2009)

*Re: The Fine Gael alternative to NAMA*



Duke of Marmalade said:


> t in practice there are big negatives in nationalisation


Such as?


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## Duke of Marmalade (1 Sep 2009)

*Re: The Fine Gael alternative to NAMA*



Complainer said:


> Such as?


Some arguments against nationalisation are:
1) difficulty in raising international funds (I don't understand that one, but most experts seem to believe this)
2) Politicisation of banking decisions. e.g. why should the government deny mortgage finance to one of its citizens just because they don't like their credit rating?
3) In general, the private sector operates more efficiently than the public sector at least in commercial enterprises (I know, the track record of private sector banking ain't great)


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## canicemcavoy (1 Sep 2009)

*Re: The Fine Gael alternative to NAMA*



Duke of Marmalade said:


> A logical argument but in practice there are big negatives in nationalisation which IMHO justify keeping the current paradoxical model. But it should (and will) be much more heavily regulated (reflecting the effective State guarantee).


 
I've asked before, many times, exactly what regulation the goverment has proposed for the banks, and have heard zilch.

And that doesn't even take into account the fact that, during boom times, such regulation is inevitably rolled back because, you know, we don't need it anymore.


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## Mpsox (1 Sep 2009)

Surely the main point against nationalisation is the cost involved. If AIB/BOI were nationalised, how much would the state have to pump in to sort out the toxic debt situation and get them to a stage where they can start providing credit again?


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## Brendan Burgess (1 Sep 2009)

Mpsox said:


> Surely the main point against nationalisation is the cost involved. If AIB/BOI were nationalised, how much would the state have to pump in to sort out the toxic debt situation and get them to a stage where they can start providing credit again?



What????

They have already committed to pumping in the money via NAMA to sort out the toxic debt situation.

Brendan


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## Mpsox (1 Sep 2009)

Brendan said:


> What????
> 
> They have already committed to pumping in the money via NAMA to sort out the toxic debt situation.
> 
> Brendan


 
I'm assuming nationalisation as an alternative to Nama, not an add on. What would the Labour party approach cost?


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## North Star (1 Sep 2009)

Below is a post arguing aganist nationalisation that I posted in May, my opinion remains unchanged- Of course we can nationalise the banks but for what purpose?
The key question is how do we get the banks lending in sufficient volume to meet their own customers needs and additionally replace the 33% of credit that is provided by offshore banks who want to exit Ireland? 

"Personally I find the rush to extole the merits of nationalising the banks worrying. Be careful what you wish for is a phrase that comes to mind. 
If the primary objective is to protect the system and stimulate/support sustainable lending to businesses and individuals, then the focus should be on the probability of that being achieved. Either way the taxpayer is running risk, either through overpaying for the assets or more dangerously through much higher social welfare as unemployment rises and stays at elevated levels for a long period. Thats why the banks are of systemic importance. A couple of thoughts
1) there have been several examples of situations when banks/banking systems have been technically insolvent, e.g The savings and loans crisis in the U.S in the 80s. What the banks require is time to trade their way out of the current position. Clearly they can not do this on their own and need external support i.e the Govt. on a temporary basis.
2) We as a country rely heavily on external investors to fund our Govt, our banks and our companies. Laterly we have very high reliance on ECB (as do many other countries including Germany). If the banks were nationalised, the damage to our external perception would be huge and in my opinion would have hugely damaging impact on the Govts. ability to fund its self and all the banks liabilities that it would have taken on. This were it to happen will cost the tax payer both in much higher external debt and in much more expensive funding costs. We must maintain international confidence in our ability to manage our debt.
3) There is little evidence that a nationalised bank can or wquld be capable of lending on the scale required to sustain employment. Has Anglo Irish been knocking on doors offering value loans?? obviously not, their immediate priority is to fund themselves
4) Current bank management can and have been replaced, with hopefully more to come, the executives should take personal responsibility for failing their fiduciary duties.
5) The Dept of Finance does not have the resources to effectively run our banking system
6) I find it difficult to imagine a state bank not having to deal with political influence/interference. 
7) The Nama legislation wont be passed until near the end of the year, in the meantime all options such as a bank assurance scheme should still be on the table.
8) If Nama pricing requires Capital writedowns that force the banks to seek more Capital, the cost ultimately will I believe be far higher to the taxpayer than in technically overpaying for the assets.
9) We need to be pragmatic and take the steps which offer the highest likelyhood of having a normal/robust and privately held banking system. Once we are there, then we can demand whatever bank levy/dividend the Govt deems to be appropriate.
As politicians, they wont loose any votes chasing the banks once they start making profits again"


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## canicemcavoy (1 Sep 2009)

The problem is - is the function of NAMA to (a) get the banks giving credit or (b) to interfere with the market and artificially halt the fall of property prices? Lenihan himself says (a):

"If we have a flood of property dumped on the market, we will have an utterly unsustainable position, and that's one of the reasons why we have to establish NAMA and try and *establish a floor in this market*."

Does (b) always lead to (a)? Is (b) in itself desirable?


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## sydthebeat (2 Sep 2009)

*Re: The Fine Gael alternative to NAMA*



Duke of Marmalade said:


> Some arguments against nationalisation are:
> 1) difficulty in raising international funds (I don't understand that one, but most experts seem to believe this)
> 2) Politicisation of banking decisions. e.g. why should the government deny mortgage finance to one of its citizens just because they don't like their credit rating?
> 3) In general, the private sector operates more efficiently than the public sector at least in commercial enterprises (I know, the track record of private sector banking ain't great)



none of these cons are applicable to chinese banks, which are nationalised (in the true sense of the meaning)... so why should we accept them as being true for irish banks.



			
				Ellen Brown said:
			
		

> _As the rest of the world sinks into the worst recession since the 1930s, China has maintained a phenomenal 8% annual growth rate....How can China’s stimulus plan be working so well, when ours is barely working at all? The answer may be simple: China has not let its banking system run roughshod over its productive economy. Chinese banks work for the people rather than the reverse....In China, unlike in the U.S., credit has been flowing freely, not just to the financial sector but to industry and local government. State-owned banks have massively increased lending, with local governments and state enterprises borrowing on a huge scale. The People’s Bank of China estimates that total loans for the first half of 2009 were $1.08 trillion, 50% more than the amount of loans Chinese banks issued in all of 2008. The U.S. Federal Reserve has also engaged in record levels of lending, but its loans have gone chiefly to bail out the financial sector itself, leaving Main Street high and dry.
> 
> For the time being, at least, China’s stimulus plan is clearly working better than those of the U.S. and the U.K.; and a chief reason it is working better is that the government has a grip on its banking sector. The government can operate the banks’ credit mechanisms in a way that serves public enterprise and trade, because it actually owns the banks, or most of them. Ironically, that feature of China’s economy may have allowed it to get closer to the original American capitalist ideal than the United States itself. China is often referred to as communist, but it has never really been communist as defined in the textbooks, and it is far less so now than formerly. Communist Party leader Deng Xiaoping, who opened China to foreign investment after 1978, famously said that it doesn’t matter what color the cat is, so long as it catches mice. Whatever the Chinese economy is called, today it provides a framework that effectively encourages entrepreneurs.
> 
> Meanwhile, the U.S. has sunk into what Jim Rogers calls “socialism for the rich.” When ordinary U.S. businesses go bankrupt, they are left to deal with the asphalt jungle on their own; but when banks considered “too big to fail” go bankrupt, we the taxpayers pay the losses while the banks’ owners keep the profits and are allowed to continue speculating with them. The bailout of Wall Street with taxpayer money represents a radical departure from capitalist principles, one that has changed the face of the American economy. The capitalism we were taught in school involved Mom and Pop stores, single-family farms, and small entrepreneurs competing on a level playing field. The government’s role was to set the rules and make sure everyone played fair. But that is not the sort of capitalism we have today. The Mom and Pop stores have been squeezed out by giant chain stores and mega-industries; the small private farms have been bought up by multinational agribusinesses; and Wall Street banks have gotten so powerful that Congressmen are complaining that the banks now own Congress. Giant banks and corporations have rewritten the rules for their own ends. Healthy competition has been replaced by a form of predator capitalism in which small fish are systematically swallowed up by sharks. The result has been an ever-widening gap between rich and poor that represents the greatest transfer of wealth in history. _


_
http://www.webofdebt.com/articles/secret_of_china.php
_


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## Askar (3 Sep 2009)

I hear that Bo Lundgren is on the airwaves critical of NAMA and advocating nationalisation in line with Swedish experience. 

I really don't think the public should be fooled by the investor flight arguments. It seems the old FOFOC argument serves many purposes - these bondholders are not currently lending to the banks; rather it is the ECB that is keeping things afloat and this position will continue for the short term regardless of nationalisation or NAMA imo.


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## Askar (3 Sep 2009)

canicemcavoy said:


> _Moderator's note: moved from the thread on Fine Gael's proposal_
> 
> It doesn't seem to me to be tenable to have private firms in a position where, knowing they are "too big to fail", they can continue to essentially blackmail the country into bankrolling them, knowing they can be reckless in the quest for profits during booms, then fall back to begging-bowl mode during the inevitable crash.


 
In economic terms this is known as moral hazard. One of the great flaws of NAMA as proposed is that it does not address this properly. Some folks suggest that putting in lending targets into the legislation will resolve this. Given what we know about the appalling lack of appropriate regulatory design or enforcement in the banking industry on banks lending criteria it would not be beyond the banks to ignore these criteria or simply self certify compliance as per previous practice.


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## RIAD_BSC (4 Sep 2009)

It is possible to wipe out the existing shareholders of the banks (thus addressing the moral hazard question) and still avoid full nationalisation.

Remember, when the assets are removed from the banks, they will be clean and probably attractive to private investors. If the government gives them a big enough 'haircut' they will wipe out the shareholders. The state steps in to then immediately underwrite a share placement for the banks on the Irish stock exchange.

Once a sizeable portion of the bank's shares remain in freefloat (even if the state retains a majority stake) then we apparently don't encounter the problems regarding increased borrowing costs for the country etc.

Many people with knowledge of the situation believe that Lenihan is planning for just this scenario. He may surprise some people with the severity of the Nama haircut, and the shareholders of AIB and BOI may yet end up being wiped.


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