Hear the full interview with the Treasury secretary ...
The debate over whether the U.S. government will end up nationalizing the banks is usually presented as an either/or proposition — either the government takes over the banks to keep them from becoming insolvent or it leaves the banks in private hands.
The Obama administration seems to be working on a subtler approach, somewhere between the two. As Planet Money correspondent Adam Davidson tells Steve Inskeep, the official word is clear: The Obama administration and Federal Reserve officials say that nationalizing the banks is the wrong choice and that they have no intention of doing it.
When officials talk about nationalizing banks, they meaning taking a majority ownership, running the banks for a short time and then selling the assets to a private party as quickly as possible. "They say, 'It's not our strategy, '" Davidson reports.
Davison recently spoke to Treasury Secretary Tim Geithner, who made the government's position plain. "It's not the right strategy for the country," Geithner said, "for basic practical reasons that our system will be stronger if it remains in private hands, with support from the government to make sure those institutions can play their critical role going forward."
So why does everyone keep talking about nationalization? "What I notice is every time an administration official or a Fed official talks about nationalization, they say it's not the right strategy — 'It's not how we think it should happen.' President Obama has used that same language several times. I have not heard in any public statement them saying definitively, 'We are not going to do it, take it off the table.'"
The administration knows that investors around the world think the U.S. government is heading toward bank nationalization and that anything short of an absolute declaration will be perceived as a "maybe," Davidson says.
Administration economists might be as resolutely opposed to nationalization as they sound. "I find that not 100 percent convincing," Davidson says, "because many of their colleagues in academia outside of politics say, 'No, no, it clearly is a preferable strategy, or at least it should be very much on the table.'"
On the other hand, the administration has major political reasons not to nationalize the banks. Republicans would call the move socialism. Democrats with strong ties to banking and Wall Street would find themselves in the position of having taken contributions from people they were now kicking out of jobs.
Administration officials won't discuss nationalization, even off the record, for fear of setting off a global bank run, Davidson says. One independent analyst he has interviewed, Sean West of Eurasia Group, says the administration's stress tests for banks have created a situation where struggling financial firms can nationalize themselves. If Treasury's stress tests show a bank is in trouble, the bank can ask the government to step in.
"The net effect, rather than actually talking in language of nationalization, it's really [that] we're looking at the government has opened the door to increasing ownership of these banks," West says.
West's scenario, of increasing government intervention, has gotten a preview with large institutions like Citigroup. Now the government's stress tests for banks have created a situation where struggling banks can nationalize themselves. If a stress test shows the bank is in trouble, the bank can ask for a capital injection from the government.
Davidson says, "It's not the Obama administration coming out and saying things that would anger Democrats and Republicans and many others. It's the banks saying, 'Hey, we need this,' which gives the Obama administration tremendous cover."
Is it possible the administration is following in the footsteps of President Franklin Delano Roosevelt, who improvised his way through fixing the banking crisis of the Great Depression?
"Absolutely," Davidson says. "No one has ever faced a crisis like this. There is no rule book. It would be shocking if they weren't improvising to some degree. Plus, the facts on the ground are changing in front of them every day."