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Nationalize the insolvent banks?
( NO, NO, NO! )

Mar. 1, 2009
By Vic Singer


Our print and broadcast media in recent months have been inflating trial balloons for nationalization of our banking system as a panacea for our current economic malaise, without exploring the downside. An example appeared as a 2/17/09 Wilmington News Journal OpEd article, headlined "Sweden had it right: Bite the bullet, nationalize the banks" by NYU Stern School of Business Professors Matthew Richardson and Nouriel Roubini. The article asserted that:

"The US banking system is close to being insolvent, and unless we want to become like Japan in the 1990s, or the US in the 1930s, the only way to save it is nationalization. As free market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the US banking system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late."

The downside flows from the Fifth Amendment of the Constitution, that "No person shall . . . be deprived of life, liberty or property without due process of law, nor shall private property be taken for public use without just compensation." The banking system cannot be nationalized - - converted to government ownership - - without paying off the present owners. Deciding how much to pay for the insolvent banks would require years of litigation. Evidently, the authors of the News Journal OpEd article and other proponents of nationalization don't recognize a widely used alternative that shatters their assertion.

The Sherman and Clayton Antitrust Acts (1890 and 1914) and the Federal Trade Commission (FTC) Act (1914) addressed situations where the competitive market that ordinarily controlled behavior became ineffective. The Acts were prompted by economic entities grown so large as to enable predatory noncompetitive behaviors, which came to be regarded as dangerous to the competitive system that had nurtured the economic entities.

The Acts authorized termination approaches for such behaviors upon recognition that a noncompetitive marketplace already existed or was imminent, including breaking up the dangerous entity and imposing other controls of behavior. Implementations of these Acts were particularly conspicuous long ago in Delaware: the forced breakup of the bond between DuPont and General Motors, and the creation of Hercules and Atlas as spin-offs from DuPont.

Disarming the competitive market forces that ordinarily control behavior - - the focal point of the Clayton, Sherman and FTC Acts - - is also approachable from a different direction. Economic entities can grow so large that they cannot be allowed to fail during a business downturn because failure would devastate the economy that nurtured them. Then they must be kept afloat by Government action even when Government support disarms the ordinary free market forces. Since such entities cannot be allowed free reign in the market place, controls must be devised and implemented.

The Professors and other nationalization proponents disregard a peculiarly American invention for dealing with situations where free market controls are themselves excessive burdens on the public well-being. That is the Investor-Owned Public Utility. The operating entity is investor owned, the capital plant is investor owned, publicly owned, or a combination, and both service and profitability are government-regulated.

The utility regulatory approach does NOT demand buying out the prior ownership. It has been thoroughly tested in the courts, notably in the Federal Power Commission versus Hope Natural Gas case in 1943 and 1944. The Hope case established that when the operating entity is given an opportunity rate of return commensurate with maintaining its continued attractiveness in the money marketplace, imposing regulation does not constitute a taking.

The utility regulator controls and authorizes, beyond allowable operating expenses, an opportunity rate of return that maintains its attractiveness for however much capital investment - - for plant used and useful in the public service - - is necessary to meet public service requirements. The opportunity rate of return is judged on current and anticipated money market conditions for enterprises of commensurate risk. (Coverage issues sometimes enter the regulatory fray, as complications rather than philosophical key points.)(Delaware law also permits the utility regulator to reduce rates for service on its perception that the profitability is excessive.)

An analog of just such a scheme has long been used for regulating insurance companies, which focus on balancing long term and short term money transactions rather than on providing commodity, energy or information transfer services. Even though competitive market forces are effective behavior controls, an insurance company's inability to meet its commitments would devastate numerous innocent victims. Insurance companies are regulated because they cannot be allowed to fail without some sort of coverage for their commitments.

Another analog of the investor-owned publicly regulated public utility approach is a viable middle-ground solution for current problems with our economy. Indeed, our economy has long been an example of unstable equilibrium - - a cone balanced on its point - - for which such a remedy is unavoidable in the long run. But the investor-owned publicly regulated public utility model didn't become timely as long as the economy could muddle along in distinctly human fashion, stumbling occasionally on the truth, then picking itself up and continuing on the original path. Catching public attention requires the firm smack of a 2 x 4 on the forehead.
 

NOW WE'VE GOTTEN THAT MESSAGE !


Victor Singer, a retired rocket scientist and engineer, is currently Chairman of the New Castle County Planning Board, a member of the Delaware's Water Supply Coordinating Council and the Delaware Coastal Zone Industrial Control Board, and a past-president (1980-1982) of CLNCC. He and Frances West, another CLNCC past-president, co-authored the Delaware Public Utilities Act of 1974 which established Delaware's prevailing utility regulatory scheme. Singer's formal interventions thereafter in numerous electric energy rate proceedings, eventually as the "Public Intervenors" (with Ted Keller) funded for technical and legal staff by Delaware's General Assembly, produced major changes in Delmarva Power's operating philosophies and the regulatory practices of Delaware's PSC.

 


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