February 25, 2009
By Wade Rousse
With all of the talk about certain banks being nationalized, it seems logical to discuss the term. However, nationalization is currently being used very loosely. No one seems to know exactly what it means.
The Webster on-line definition is as follows:
“Nationalization - acquisition and operation by a country of business enterprises formerly owned and operated by private individuals or corporations.”
That definition seems pretty straightforward. Here’s an example of nationalization in the banking sector. Suppose a bank becomes insolvent. The common stock of that bank will trade to zero. Therefore, common share owners will be wiped out (their equity no longer exists). If the government thinks the systemic risk of allowing that bank to fail is too large, it takes complete ownership of the bank, bad debt and all. At that point, the bank is nationalized.
In the current environment, this is not how the term is being used. However, from a historical perspective, I think this is what’s meant by “nationalizing a bank.” Perhaps the current loose use of the term is what is causing cynicism among the public. I think what the public and some television personalities are referring to as nationalization is really just government assistance.
Any thoughts about the current misinterpretation of nationalization?
Posted by Wade at February 25, 2009 3:01 PM
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