US UK Banks: Nationalization on the Cards

Things might seem to be fine on the surface but troubled times for banks in US and UK are not yet over. The losses by US banks alone amounted to $1.8 trillion which is more than their $1.4 trillion Net Worth. The sad part is that most of these banks including the "Paper Juggernaut Citi" are not showing signs of recovery and are just working on damage control.

So this brings a question into picture that many economists worldwide are contemplating on. Should these banks be nationalized temporarily? The Government already has a 60 to 80% stake in several of these banks post the bail out. I am an advocate of free markets but at this juncture the more important thing is to turn the banks around and that will not happen unless the hollow ineffectual managements of these banks are removed. This will only be possible if these banks are temporarily taken over by the government which elects representatives of the management and shapes the banks' future for the next few year and then privatizes them again.

This might seem like a wild idea but countries have done this successfully in the past. Sweden nationalized its banks during a crisis in the early 1990s and for the most part privatized them again once they were stabilized. Ireland nationalized Anglo Irish Bank in January and has spent some $9 billion to recapitalize Bank of Ireland and Allied Irish Banks. In Berlin this week, the government said it would prefer to take a majority stake in Germany's struggling Hypo Real Estate Holding rather than nationalize the property lender.

Nationalized banks usually do not perform as well because their primary objective is employment and subsidies to a particular sector. Moreover, they have a much looser corporate governance as compared to a private bank. Its a tightrope walk but the existing management of these banks have caused enough havoc for a lifetime and I think that a temporary nationalization might not be such a bad idea after all.