Ignoring FDIC, ABC's Stark says bank nationalization happens “in socialist countries” and is “not supposed to happen” in the U.S.

Written by Christine Schwen

Published

On World News, business correspondent Betsy Stark stated: “Wall Street is the bastion of free-market capitalism, and nationalization, even if it's meant to save the banks, is something that happens in socialist countries; it's not supposed to happen in the United States.” In fact, the FDIC has acted as receiver assuming all deposits for 66 failed banks since October 1, 2000. Indeed, Cato Institute senior fellow Gerald P. O'Driscoll Jr. wrote, “The federal government, under the auspices of the FDIC, can be said to routinely nationalize failed banks.”

On the February 23 broadcast of ABC's World News, anchor Charles Gibson asked business correspondent Betsy Stark “why nationalization is considered such a dirty word,” and Stark replied, in part: “Wall Street is the bastion of free-market capitalism, and nationalization, even if it's meant to save the banks, is something that happens in socialist countries; it's not supposed to happen in the United States.” In fact, the Federal Deposit Insurance Corporation (FDIC), an "independent agency of the federal government" that describes its mission as “insuring deposits, examining and supervising financial institutions, and managing receiverships,” has acted as receiver assuming all deposits for 66 failed banks since October 1, 2000. Indeed, economists including Cato Institute senior fellow Gerald P. O'Driscoll Jr., a former vice president of the Federal Reserve Bank of Dallas and Citigroup, and Nobel laureate Paul Krugman have stated, in Driscoll's words, that "[t]he federal government, under the auspices of the FDIC, can be said to routinely nationalize failed banks."

In a February 23 Wall Street Journal op-ed, Driscoll wrote:

There is a great deal of imprecision in all the talk of nationalizing banks. The government, through the Federal Deposit Insurance Corp. (FDIC), temporarily takes over insolvent banks when it closes them. When it can, the FDIC sells a failed bank to another institution. Sometimes the purchaser does not want some or any of the failed bank's assets. The FDIC must either then pay the buyer to take the assets (subsidize expected losses) or take over those assets. In a limited number of cases, there is no buyer for a failed bank. IndyMac Bank is a notable recent example. It has been operated since last year as an FDIC-owned institution (IndyMac Federal Bank) with the goal of finding a private buyer.

Certainly, in the latter case, a government agency has taken ownership of a bank. The federal government, under the auspices of the FDIC, can be said to routinely nationalize failed banks. There is nothing new about that policy and it certainly occurs more than once every 100 years.

Similarly, in a February 23 New York Times column, Krugman wrote:

Still, isn't nationalization un-American? No, it's as American as apple pie.

Lately the Federal Deposit Insurance Corporation has been seizing banks it deems insolvent at the rate of about two a week. When the F.D.I.C. seizes a bank, it takes over the bank's bad assets, pays off some of its debt, and resells the cleaned-up institution to private investors. And that's exactly what advocates of temporary nationalization want to see happen, not just to the small banks the F.D.I.C. has been seizing, but to major banks that are similarly insolvent.

From the February 23 broadcast of ABC's World News with Charles Gibson:

GIBSON: And I'm curious why nationalization is considered such a dirty word. The Obama administration has been at pains to say, “We're not going to nationalize the banks,” but a lot of economists, and you heard some there, say this could actually be a positive step if the banks were to -- a couple of banks were taken over for a couple of years.

STARK: A couple of things, Charlie. I mean, one of them -- one of them is just about money. If banks are taken over by the government, then private investors could see the value of their shares either severely diluted or wiped out altogether. But the other thing is philosophical. Wall Street is the bastion of free-market capitalism, and nationalization, even if it's meant to save the banks, is something that happens in socialist countries; it's not supposed to happen in the United States.