Nouriel Roubini, the economist who warned of the financial collapse long before it happened, is making waves again, this time with an opinion piece he co-authored in the Washington Post in which he and fellow New York University economics professor Matthew Richardson argue that U.S. banks should be nationalized.

An excerpt:

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages...

... Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.

This is really breath-taking, that even free-market economists are talking about the federal government taking over the nation's largest banks. I'm not sure which is more mind-bending, the thought of an African American in the White House or Citigroup becoming part of the Executive Branch. Bank of America would truly be living up to its name then.

What's even more astonishing is for a Republican from South Carolina, not Maine mind you, but the Palmetto State, a conservative like Sen. Lindsey Graham, to say that nationalization needs to be something to consider. And he wasn't alone. Rep. Peter King of New York also allowed for this possibility.

 

Nationalize the Banks! We're all Swedes Now

By Matthew Richardson and Nouriel Roubini
Sunday, February 15, 2009; Page B03