Plan N Gains Ground

A pair of articles in the Financial Times detail some unlikely champions of Plan N: DC politicians, and Alan Greenspan.

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.

“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.

Now, before you get all impressed that Mr. Bubble has finally seen the light, he has some caveats that are worth examining:

But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

The notion of protecting "senior debt" is amusing: if all the banks are insolvent, and they all owe each other money, who is going to pay that debt off? Increasingly it's looking like the price for allowing Plan N is making sure as few banks as possible die. The problem is they're all terminal. Selective rehabilitation without systemic reform means that the banks that survive will still be insolvent without trillions of taxpayer dollars.

We're closing down Peter so that Paul doesn't have to pay him back. Perhaps the pile of banks in the country needs to be whittled down to a much smaller number in order to have a financial system small enough that it can be saved. But again, when they are all insolvent, who decides who lives and who dies?

We'll see.