Thus, the government–but mainly the U.S. Congress and the U.S. media–says that banks are not lending. While it is true that there are some banks that have liquidity issues and are not in a position to lend, the biggest issue is that consumers and businesses do not desire to borrow due to current economic conditions and the lousy prospects for jobs and consumption in the near- to medium-term. In fact, after more than a decade of consuming off the charts, and being criticized for doing so, consumers are finally saving! And businesses are not investing because future prospects have never looked so bad. This means that until the overall perception in the future changes to a more positive outlook, we should not see much of an improvement on the desire of economic actors to borrow from the financial system.

So, let’s go back to my main concern: what is this nationalization talk all about? Well, if the U.S. government takes over the banking system, or even takes over a large U.S. bank, will this mean that one of the objectives would be to use that bank to push money out to consumers and businesses? However, if consumers and businesses are not in a position to borrow, how do you push money out of the banks?: by subsidizing lending, either subsidizing the principal of a loan or interest rates, or both. This means that the nationalized bank could be used as a monetary policy instrument to increase money supply and thus avoid a deflationary process from setting foot in the U.S. economy. The idea is to nationalize one large bank or many large banks so that the objective of lending to everybody could be achieved. Mexico tried this route back in the 1980s (September 1

Furthermore, the nationalization of banks for these purposes has compromised the independence of each country’s central bank, and has dissolved any separation between monetary policy and politics, potentially encouraging lending irrespective of consumers’ and businesses’ ability to pay. The consequences of this have been, as I said before, catastrophic, to say the least.

In fact, contrary to many arguments regarding the size of the U.S. banking system and the impossibility of nationalizing the whole of the system and compared to the banking system of other countries, a government does not need to nationalize all the banks. In principle, it could nationalize the one with the largest distribution channel across the country and pursue its lending policies through it. The rest of the banking industry will also get indirectly nationalized because they will have to compete with a bank that is subsidizing loans (or interest rates, or both).

Do we need this for the U.S. economy? No, because the U.S. banking system already has a process in place by which the FDIC takes over failed banks, cleans them up and sells the "good" bank back into the market. And this process has worked relatively well over the years. Why are we not relying on this system to fix the financial system this time around?

Bank nationalization is not a panacea. If bank nationalization is used as an instrument of monetary policy, that is, to make subsidized loans, then bank nationalization is an instrument that destroys the independence of monetary policy and turns monetary policy into an instrument of the political system. Many of the countries that have nationalized their banks for the above purposes during their history have had to face hyperinflation at some point in time. This was the case of Argentina and Israel.

The discussion on bank nationalization, so far, has missed a very important point that directly affects the political usefulness of this very radical measure. Let’s recap: what is one of the reasons why many sectors are asking for the nationalization of banks? If I am correct, one of those reasons is that banks–that is commercial banks, because investment banks are already part of history and belong to the Smithsonian–are not lending enough, or at the levels that politicians believe banks should be lending. The argument goes further: because the taxpayers have been investing money into these banks, these banks should be using these investments to lend more. However, what these sectors don’t say is that banks are paying a very high rate on those investments. TARP funds are expensive. At 5% (after tax), they cost more than what most loans are yielding these days. So the only way the TARP funds can be lent out is in combination with low cost deposits. Thus, banks need to have $5 to $10 dollars of incremental deposits for each $1 of TARP to lend out. st, 1982), Argentina did it in 1947 under the first Peron administration, France did a partial nationalization in 1945; in 1969 there was a partial nationalization of the banks in India; Israel nationalized its major banks in 1983 and then suffered a hyperinflationary process, etc. And the consequences of this have been catastrophic in terms of economic activity, inflation, the country’s currency and the overall stance of those countries in the world economy.