Expert: Expanded Bailout Is Not Nationalization

MELISSA BLOCK, host:

Now we're going to hear about the potential implications of the government taking a stake in private banks. And for that, we turn to Kenneth Rogoff, professor of economics at Harvard. Welcome back to the program.

Dr. KENNETH ROGOFF (Professor of Public Policy and Professor of Economics, Harvard University): Thank you so much.

BLOCK: And first of all, would you consider nationalization to be the right word to be describing what we're seeing here?

Dr. ROGOFF: No, we're not at nationalization yet, but this is a profound movement. And the point isn't that the administration decided to do this. The point is they found there was no choice. They were backed into a corner. We were really facing a wholesale meltdown in the global financial system. There is no hyperbole than can overstate it. And no one trusted anyone. No one wanted anything but Treasury bills. And finally, they've had to basically turn bank debt into Treasury bills.

So they're buying some stock, or taking some shares, but, I mean, we can back out of that after a couple of years. But now that the system has shown itself, has revealed itself to be so vulnerable to these, really, new-age bank runs, it's hard to imagine we're just going to put it back the way it was. There is going to have to be a different regulatory structure.

BLOCK: Is it a question of scale? I mean, is your hesitation in calling it nationalization because it's partial? Is it sort of like being, you know, a little bit nationalized at this point?

Dr. ROGOFF: Well, a good analogy, perhaps. But, I mean, the - I think the government isn't intending yet to run the firms. But I think part of that is they just haven't looked ahead very many moves to figure out how they're going to back out of this. It's one thing to say that we're going to sell the shares. It's another thing to say that we're going to let investment banking, you know, proceed the way it did where people would have what we call leverage ratios, how much they borrow relative their cash go to 30 and 40, which needless to say is very risky.

We have this whole shadow financial system that's grown up and become very important, totally unregulated. And we found that when it melts down, it's a problem, and that it's just as vulnerable to good, old-fashioned bank runs as the conventional bank system. They're electronic. We don't have people standing in lines like in northern Iraq. But they're bank runs just the same. So, you know, nationalization - no, we're not going to make it a big post office, the banking system. But certainly, government regulation and oversight's going to be much more deeply inserted into the system when this is over.

BLOCK: How did - what the Treasury Department did today, how does that differ from what the British have done with their banks?

Dr. ROGOFF: Well it paralleled it a lot. I mean, it was very, very close to what the British did. I mean, the key elements, the equity injection was giving them cash because they're desperate for cash. But really, more urgent was that we raised the limit on deposit insurance very broadly as Sheila Bair just outlined. And also, they don't trust each other, lending to each other, and we're standing behind that. Our hand was forced by the British and the Europeans, because once they were standing behind their banks, everyone would have been scared of ours, and business funds certainly would have flown the coop. So we really had to do it. I do think it was the right thing to do.

BLOCK: I want to briefly ask you to comment on a remark made by one of our political commentators last week, David Brooks in the New York Times, who concluded that the era of conservative free market economics is largely over. Do you agree?

Dr. ROGOFF: I certainly don't agree with that. I mean, it's certainly true in the financial sector we've had cowboy, you know, capitalism, run amok in the financial sector. But it's a small part of our economy. We had our tax sector collapse at the beginning of this century, and now it's regrown. We have many other powerful important industries - you know, pharmaceuticals - many other industries where the United States is very powerful. Financial services is four percent of U.S. GDP, but it's a very dangerous four percent and very important. That's going to change. But I'm not sure that necessarily we're going to back away from free trade and free markets. That's a little strong.

BLOCK: OK, Kenneth Rogoff, thanks a lot.

Dr. ROGOFF: Thank you.

BLOCK: Kenneth Rogoff is a professor of economics at Harvard University. He's also former chief economist at the International Monetary Fund, and he's provided occasional advice to the campaign of John McCain. Transcript provided by NPR, Copyright NPR.