Has Banking Been Nationalized?

This week, governments in Europe and the U.S. have committed taxpayer funds to buy preferred stocks in private banks, effectively becoming part owners. In return, the banks will use the funds as capital to start making loans again, and can usually put out $10 of loans for every $1 taken in as capital. In this way, the world's credit markets can get jump-started, preventing a more severe recession that the one already predicted.

However, has this brought the world closer to Socialism? In some respects, the answer is yes, since the government will have a say in how the banks are run. Banks may not use the capital to buy back their own stock, and participating banks have can only expense the first $500,000 of CEO compensation. The government also has the right to purchase additional shares of common stock at a discount, thus potentially increasing its ownership.

On the other hand, preferred shares do not give voting rights, thus limiting some of the government's control. Furthermore, at least in the U.S., the government's 5% quarterly dividend increases to 9% after the first five years, effectively stating that it wants banks to buy back the shares from the U.S. Treasury.

In other words, this is a short-term fix, not a shift in policy. The Treasury Department does not want to stay in business as a bank owner or manager. Although the new President and Congress could change this during the next five years, that is not the intention. And, since the causes of the crisis have yet to be addressed, the new President and Congress will have its hands full trying to fix the structural flaws in the banking industry, leaving it little time to further the socialization of banking.

What It Means to You

As the $350 billion works its way into banks large and small over the next few weeks, expect credit for businesses to ease. The main impact for you are the things you wont' see: many familiar stores and businesses closing for lack of funds, a much higher rate of bank closings, and large-scale (10-20%) unemployment.

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