Will nationalization work?

The original argument for nationalization as the financial crisis was unfolding was that it would be seen as a bold preemptive move that would restore confidence in the financial sector. As arguments against (see Alan Blinder) and for nationalization (see Stiglitz) continue, the question that hangs over the economy is the following: Will it restore confidence and get the economy going again?

The assertion (without evidence) here is No - that if nationalization had taken place back in October then perhaps there was a chance. While public debate is a feature of a democratic society, the debate over nationalization has undermined what could have been a swift, bold, forceful action into one that can be viewed cautious, uncertain and perhaps even incompetent.

In this sense, the public, politicians and economists are like dogs and wolves while the regulators and those who undertake nationalization are ordinary people. Once the dogs and wolves smell the fear and uncertainty in the regulators, nationalization won't stand a chance.

As argued by Stiglitz however, it does not mean that nationalization is not a necessary feature for fixing the financial sector. Many would argue that based on Japan's experiences, fixing the financial sector is a necessary first step. Moreover, as argued by Richard Clarida the financial sector provides the multiplier for any kind of fiscal stimulus.

The time for nationalization has passed. While nationalization may be required for fixing the financial sector, the process will be long and arduous. The experiences of Fannie and Freddie point to how difficult this could be even though the takeover of these two institutions would at the time be considered bold and forceful. However, these institutions have a legacy of being an implicit part of the U.S. Treasury.