Nationalising US banks

Nouriel Roubini of Stern School believes nationalisation is the best of all options open in the present crisis. That's exactly what I have been saying. Roubini argues in a Business Standard piece that other options- such as recapitalisation, creation of a "bad bank" to house toxic assets, guarantees for private purchase of toxic assets- all face the problem of government or the tax payer overpaying the private sector and subsidising shareholders of insolvent or distressed banks.

With bank nationalisation, shareholder and bondholder losses can be immediately recognised and any upside on revival belongs to the tax payer. What about the cost? Roubini estimates losses at $3.6 trillion about half of which is in the American banking system. That means the US governemnt having to fork out $2 trillion.

It's still worth it because of the time factor. Any involvement of the private sector will be long drawn out, its outcome uncertain and losses will mount. Had the government stepped in earlier, it would have probably written a smaller cheque. It all boils down on how long we want the crisis to stretch out.