Bernanke on Banks

For all his reputation as President Silver Tongue, Mr. Obama sure has had trouble articulating a coherent response to the cries of bank nationalization. Maybe he should stop trying and leave the public banking remarks to Federal Reserve Chairman Ben Bernanke.

In a Tuesday Senate hearing, Mr. Bernanke told Republican Senator Bob Corker that even banks that are too big to fail aren’t too big to be controlled by government. He said they are sitting on bad assets, but retain franchise value and decent cash flow. He was the first person in charge to point out that the government already “props up” the banking system through depositors insurance and other guarantees.

He was also clear that even if public capital is needed to shore up banks through this time, the goal is for it to leave when banks are doing well enough for private capital to flow back in. Public capital in, banks get healthy, private capital returns, public capital out. That’s a temporary measure some are calling nationalization, but the way Mr. Bernanke puts it mutes the sound of socialism.

In the video below, listen to:

  • His explanation of the public capital injection. (4:20)

  • His suggestion to use the term “public-private partnership” instead of nationalization, and his explanation that, “It’s not nationalization because the banks would not be wholly owned, or probably even majority owned, by the government.” (6:35)

  • His answer to why anybody would buy common shares in banks today: “Well, they wouldn’t today, but I think eventually they will as all the elements of the program work together to take off the bad assets, to recapitalize, and to get them restructured.” (7:34)

[youtube=http://www.youtube.com/watch?v=GvkCNnH0FLk]

In Kelly Letter Note 15, sent Feb. 15, I wrote to subscribers:

…the government is leaning toward guaranteeing crap assets so banks can keep operating in an under-capitalized state while waiting for the economy to recover.

Few economists expect that to work out. Most see the scenario going like this: government muddles along for much of this year with various stop-gap measures to prop up the bankrupt banking system, realizes in nine or 12 months that the economy is waiting on the banks as much as the banks are waiting on the economy, and finally bites the bullet with a massive bank nationalization effort.

That looks to be precisely what’s unfolding. The spokesperson for the government had better be Mr. Bernanke, not Messrs. Geithner or Obama.

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