Nationalisation is safest bet now?

Hate it, but nationalisation is safest bet now
By : HARDEV KAUR

NATIONALISATION used to be a bad word. Not any more! Developed countries such as Britain, France, Italy, Spain and even the United States have announced bailout plans for banks, including governments directly buying shares and taking stakes in these institutions.
In a word, these institutions have been nationalised.The "unprecedented" move of nationalising banks and financial institutions in these rich countries shifts the power from the markets to governments. In the US, it has moved from Wall Street to Washington. Kenneth Rogoff, a Harvard professor of Economics, described the move as making Washington the ultimate guarantor for banking in the US.It is not too different in Britain, where the move to nationalise the Royal Bank of Scotland, HBOS and Lloyds, according to analysts, makes the government Britain's biggest banker.
Government guarantee, or "nationalisation" as it was labelled by the developed nations, is something that developing countries repeatedly stressed is important to ensure that credit is channelled to the deserving and the poor.For decades, developing countries and the least developed countries have come under pressure from the rich nations and from the multilateral institutions controlled by them -- the World Bank and International Monetary Fund, among others -- and told to privatise and allow free market forces to prevail.But what have the unchecked free market forces of Wall Street led the world into? The very same voices that championed and insisted on free markets and lectured the poor and helpless are now ignoring their own advice and pushing for nationalisation, protection and government control."Government owning a stake in any private US company is objectionable to most Americans -- me included," US Treasury Secretary Henry Paulson said. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."Nancy Koehn, of Harvard Business School, said: "The goal is to get the engine of capitalism going as productively as possible. Ideology is a luxury good in times of crisis."The bailout of institutions that once were household names and considered "too big to fail" have now been nationalised. This comes in the wake of the market meltdown around the globe and turmoil in recent weeks that wiped out trillions of US dollars in just a matter of days.No matter how much nationalisation may have been despised by the White House, Paulson, in unveiling the plan, described it as "extensive, powerful and transformative". It is the same "extensive, powerful and transformative" approach that developing nations have repeatedly pointed out is necessary for their fragile and underdeveloped econo-mies.It has now been acknowledged by the US and other developed nations that nationalisation is necessary and effective "to restore confidence and avoid a collapse of the financial system".The move may have been described as being "unprecedented in cost and scale", but it is not the first time the US has nationalised companies. During World War 2, Washington took control of dozens of companies, including railroads, coal mines and, briefly, the Montgomery Ward department store chain.In 1952, then President Harry Truman seized 88 steel mills nationwide, asserting that unyielding owners were determined to provoke an industry-wide strike that would cripple the Korean War effort.In banking, the government took an 80 per cent stake in the Continental Illinois Bank and Trust in 1984. Continental Illinois failed in part because of bad oil-patch loans in Oklahoma and Texas. As the nation's seventh-largest bank, Continental Illinois was deemed "too big to fail" by federal regulators, who feared wider turmoil in the financial markets. In the end, the government lost an estimated US$1 billion on the bad loans it bought as part of the takeover of Continental, which eventually became part of Bank of America.Governments are scrambling to find solutions and restore some semblance of normalcy, but confidence cannot be legislated. Nor can it be regulated. Unorthodox measures are needed to facilitate the flow of credit. "The alternative of leaving businesses and consumers without access to financing is totally unacceptable," Paulson said."When financing isn't available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing shop." That's something developing countries have been saying for a very long time, but which those in the developed world did not hear -- if they even wanted to listen.The loss of confidence and the meltdown of markets last week threatens to dip the world into recession. The problem that began in the US housing market and emerged last August has been described by some as "financial terrorism". Markets lost confidence and they were not going to be taken in by more promises and platitudes -- not even from the seven most industrialised nations.The nationalisation plan was "not one that we wanted to take, but one that we must take", according to Paulson. He sees nine big banks -- Citigroup, JPMorgan Chase, Bank of America, Wachovia Corporation, Goldman Sachs, Morgan Stanley and Bank of New York -- agreeing to take investments totalling about US$125 billion (RM400 billion). Another US$125 billion is allocated for thousands of small and medium-sized banks which will be eligible for government investments reflecting a similar proportion of their assets.In return, the government will receive preferred shares and warrants for common stock. Paulson thinks a reasonable return can be expected. In addition, "institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that Treasury holds equity issued through this programme"."The needs of our economy require that our financial institutions not take this new capital to hoard it but to deploy it," Paulson said, meaning that they will use the money to bolster lending to each other and to their customers. This will only happen if investors and markets are confident the measures will work. The alternative is not a pretty picture.
Source: http://www.nst.com.my/Current_News/NST/Friday/Columns/2376892/Article/index_html