Nationalization & the Liquidity Crisis

Hi!

I wish people would just shut up about nationalization. What the U.S. government is doing is not "nationalizing" banks and the auto industry. This bail-out is designed to be a loan or a purchase of toxic assets from specific companies. Nationalization is when the government takes over management of an industry, by theft (basically). When the Mexican government expropriated petroleum resources in Mexico in 1938 and formed Pemex, that was nationalization. The goal was for the government to take control of the industry, not bail it out of some mess.

By purchasing so-called toxic assets from banks, the government is helping these banks get back into control. The is not that these assets are worthless, it's that they're risky and their value is hard to set. Since banks aren't loaning, there's a liquidity crisis. If you were offered a $100 check posted dated a month from now for $50, you'd take it. However, if you could only come up with $25, you'd hope that you could get it for that amount. The "not being able to come up with $50" is a liquidity problem...and when EVERYONE has it, it's a crisis. It's not that you wouldn't have paid $50, but just that you couldn't come up with the money. It's the same for banks. These assets are technically worth more, but no one can raise enough cash to buy them. This is when the government steps in. If the government pays less than they're worth, but more than anyone else could have, it's a win-win. The banks gets it's best offer and the government (read: the tax-payers) get what is expected to be a pretty good return.

This is why it's a "stimulus." If the banks get straightened out, then they can start lending again. If banks start lending, then companies can get the money they need to grow. If companies can get the money they need to grow, they can develop new products, built plants, and hire workers. If more people are working, they'll have more money to buy goods and services...and so on. If the government made this a hand-out to individuals, especially individuals who don't really need it, then it wouldn't stimulate anything other than increased demand for more populist programs...and that's more like to lead to real nationalization than economic growth.

Thanks,
Matt