Eugene Fama Wanted To Nationalize Large U.S. Banks

Update As Of 12/14/2013

Meanwhile, Prof. Eugene Fama gave a second interview to a leading German language newspaper. On 12/7/2013 appeared an interview with him in the Frankfurter Allgemeine Zeitung titled “‘Der Markt ist rational, das glaube ich immer noch’”. In the meantime (12/18/2013), a member of the editorial staff of the FAZ has confirmed to me that there is no English version of it and that the content of the interview is as accurate as reasonably possible.

Again in this interview, Prof. Fama defended our inept politicians that they would not have allowed banks to go bankrupt. However, he suggested once more these banks could have been nationalized.

Update  As Of 11/12/2013

Meanwhile, I have inquired with the editorial staff of the Neue Zuercher Zeitung and was assured that the wording of the interview with Prof. Fama is as accurate as reasonably possible. An English version of the interview is unfortunately not available.

Thus, I would have to research whether Prof. Fama in the past has voiced any similar notions previously.

Eugene Fama

He won this year’s Nobel Prize in economics. I am not very familiar with Fama’s work or with other interviews or papers with or by him.

Interview With The Neue Zuercher Zeitung

Just read his interview with the leading Swiss newspaper NZZ dated 11/9/2013. It pays to be able to speak more than one language and to read what prominent people say to overseas news media etc. Does anyone remember what Associate Justice Ruth Bader Ginsburg said in Egypt about the U.S. Constitution?

Here is the relevant excerpt from his interview (emphasis added):

“War es richtig, dass die Regierung und das Fed in der Finanzkrise alle Banken ausser Lehman Brothers gerettet haben?

Ich habe das gehasst.

Warum?

Weil es eine Perversion des Marktes ist. Nun erwartet jeder, dass diese Banken wieder rausgehauen werden, wenn sie das nächste Mal in Schwierigkeiten sind. Es werden furchtbare Anreize gesetzt – beispielsweise, weiterhin hohe Risiken einzugehen. Es wäre viel besser gewesen, die Banken vorübergehend zu verstaatlichen, ihnen die Zahlungen von Dividenden zu verbieten und sie zu zwingen, ihr Eigenkapital zu stärken; jedenfalls sehr viel umfassender, als das nach den jetzigen Vorschlägen der Fall ist. Und das alles so lange, bis sie die dem Staat entstandenen Verluste zurückgezahlt hätten. Banken brauchten sehr viel mehr Kapital, so dass sie ohne grössere Folgen pleitegehen könnten.

Wie viel Eigenkapital sollte eine Bank denn haben?

25% wären das Minimum. Die Frage muss sein: Wie viel Eigenkapital hätte die Bank haben müssen, um einen Bail-out wie 2008 zu vermeiden? Oder anders gesagt: Die Aktionäre hätten alle Verluste tragen müssen. ...

Warum wurde die Option nicht gewählt ?

Ich weiss nicht, wie es in Europa ist, aber in den USA ist das Wort «Verstaatlichung» ein schmutziges Wort. Für mich ist es das ja auch, es ist nur nicht ganz so schmutzig wie Bail-out.”

Translation

I do not have the time to translate these lengthy excerpts in its entirety. I will therefore paraphrase and summarize and risk to to some injustice to Prof. Fama.

Eugene Fama seriously claims that a nationalization of the so called too big to fail banks would have been preferable to government bailouts. He adds it should have been only a temporary nationalization until the banks have reimbursed the government for all of its expenses. He also contends that nationalization is a dirty word in the USA compared to Europe, but it is not as dirty as the world bailout.

Prof. Fama proposes a minimum 25% equity capitalization for banks to avoid future financial crisis.

With  the latter proposal I only wonder how he came up with 25% would not 10% or 20% suffice? Has Prof. Fama ever thought about why the equity capitalization of banks has been so inadequate before the financial crisis of 2008? Could it be that government regulation contributed to that e.g. like the awful Baseler Accords?

Prof. Fama completely fails to attribute any fault to government of central bank for the Great Recession and financial crisis. He actually thinks that the “perversion of markets” led to the federal government saving some banks, but let others fail. A bit peculiar!

To call for nationalization of any private businesses is a strange proposition coming from any economist. This is just another sign why economists are so superfluous, they can not predict recessions nor do they know how to respond. Too many of them are too ideological and statist.

What does Prof. Fama think why we have bankruptcy procedures at all? Should such procedure not have been applied consequently and uniformly to any bank no matter what it its size?

Previous, Related Blog Posts

Here and here.