Obama Should Nationalize U.S. Banks, Krugman Says (Update1)

 

By Brian Swint

Feb. 2 (Bloomberg) -- President Barack Obama shouldn’t hesitate to nationalize the banks that need to be bailed out, Nobel Prize-winning economist Paul Krugman said.

“If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found?” Krugman wrote in a column in the New York Times published today. “But the Obama administration appears to be tying itself in knots to avoid this outcome.”

His remarks echo those of Nassim Nicholas Taleb and Nouriel Roubini, who said last week that nationalizations will be necessary to bring the U.S. banking system out of insolvency. Obama will require banks to bolster lending in return for government aid, lawmaker Barney Frank said yesterday, stopping short of taking full ownership.

Krugman said the U.S. government’s rescue plan appears to put banking risk with taxpayers when loans go bad while giving the rewards to executives and shareholders when things go well. He cited newspaper reports that Obama’s rescue plan will include government purchases of troubled bank assets and guarantees against losses.

Treasury Secretary Timothy Geithner said on Jan. 28 that U.S. officials will “do our best” to preserve the banking system run by private shareholders.

Global economic growth will come close to a halt this year as more than $2 trillion of bad assets in the U.S. help sink economies from there to the U.K. and Japan, the International Monetary Fund said last week.

The world’s largest economy may shrink at a 5.5 percent annual pace this quarter after contracting at a 3.8 percent rate in the fourth quarter, according to a forecast by economists at Morgan Stanley in New York.

The government’s $819 billion economic stimulus package is still “very much the right thing to do,” Krugman said.

To contact the reporter on this story: Brian Swint in London atbswint@bloomberg.net