Comment & Debate
David Leonhardt. “More Than One Way to Take Over a Bank”. New York Times. February 25, 2009 – The promise of nationalization is that it, and only it, can break a self-reinforcing cycle in which banks continue to make bad bets in an effort to dig themselves out of a hole. It’s frequently said that bankers, paralyzed with fear, have been unwilling to make any new investments. But Posen points out that this isn’t quite right. In the months before they collapsed, both Washington Mutual and Lehman Brothers made the financial equivalent of a Hail Mary pass: investments that had little chance of paying off but at least had the potential to put them back in the black.
Nationalization ends the game. In particular, it prevents the banks from making Hail Mary investments with bailout money from taxpayers.