Hurray! For the first time this week, there’s no mention of “bank nationalization” or the Treasury deciding “to partly nationalize” the banks in today’s Washington Post. Journalistic accuracy finally beats back inflammatory, misleading newswriting.
Now, buying up to 3 percent of a bank’s assets through the purchase of premium stock isn’t bacon drippings on bread, either. It’s a big step and well worthy of continued attention. The former head of the St. Louis Fed, William Poole, is always worth reading, and in today’s Wall Street Journal he objects to Treasury forcing the banks into this capital-replenishing program. From “Treasury Has No Authority to Coerce the Banks“:
To my knowledge, there is no statute that permits the U.S. government to require that a corporation sell stock to the government. Is Treasury so panicked by the financial crisis that it is willing to abandon normal democratic processes, such as acting under statutory powers?
The sad thing is that there is no need to strong-arm large banks; indeed, this tactic adds risk to the financial stabilization effort.
Some will dismiss my comments as reflecting exaggerated concerns. I well remember, though, how those advocating wage-price guideposts in the 1960s dismissed fears of full-blown wage-price controls. But when comprehensive controls became politically convenient for President Richard Nixon, he imposed them in 1971.
We face the same issue with credit controls. Consider the temptation: Congress may now be able to force off-budget assistance to struggling homeowners and others through Treasury’s capital-infusion program. Isn’t it logical, members could argue, that participating banks, benefiting from taxpayer-provided capital, do their “fair share” of mortgage relief?
In managing the financial crisis, the worst may not happen — and I hope it does not. But the arm-twisting applied to the nine large banks is a terrible precedent. The danger is that the financial mess will be turned into a larger, even more critical governmental mess as well.
Poole is not at the Cato Institute, which has a collection of his recent writings.
UPDATE (12:20 p.m.): From Larry Kudlow’s interview with Treasury Secretary Paulson Wednesday:
Kudlow: Did some of these bankers worry about management control exercised by the Treasury Department? I mean clearly there are limits to executive compensation. There are limits with respect to dividend payments. And there are generic issues — will you exercise your warrants and will you exercise voting strength. In other words, is this nationalization? I think that’s on the minds of a lot of people.
Paulson: Well anything but. Anything but and this is about taking the preventative action so we don’t need to do any more radical things. Let me just take the issues you mentioned one at a time. These are relatively small positions in ownership terms. These are passive investments. Management — this is not anything like what you suggested.
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