Friday, May 1, 2009


Should US banks be nationalised?

There is a heated debate under way in the United States between those who believe that the economic policy conducted currently (very expansionary fiscal policy, massive monetary creation linked to the Federal Reserve’s purchases of various assets, measures aimed at driving down long-term interest rates, etc), will eventually kick-start activity and those (such as Paul Krugman) who believe that it is necessary to go much further, and in particular to nationalise banks in order to clean up their balance sheets and jump-start credit.

Should US banks be nationalised? The answer is positive if:
− without nationalisation, banks will ration credit,
− and if the credit crunch will prevent an economic recovery.

We believe that the real problem is not the nature of the banks’ shareholders but the cost of long-term funding for the banks; this problem can be settled by specific measures (loans guaranteed at more favourable conditions, transparency on the value of "toxic assets"), but not by nationalisation.

1 - Everything seems to have been tried to jump-start banking credit in the United States
The US administration and the Federal Reserve have implemented:

− a very expansionary monetary policy;

− purchases of real-estate related securities (the Federal Reserve’s purchases of Agency bonds and MBS, up to USD 1,450 billion), in order to drive down mortgage interest rates and encourage mortgage refinancing, which has been efficient;

− guarantee on the debts of Freddie Mac and Fannie Mae, which has markedly reduced their borrowing costs;

− asset purchases (including Treasuries) by the Federal Reserve;

− guarantee of debt and equity for funds that are to purchase banks’ toxic assets (PPIP programme, up to USD 700 billion);

− incentives to renegotiate and refinance mortgage loans (Housing Bill, providing up to USD 1,000 bn to the FHA);

− a guarantee on bank loans by the FDIC, up to USD 1,400 bn.

To see full report: SPECIAL REPORT