10 Oct 2008

Nationalizing Banks to Jumpstart the Banking System

Paul De Grauwe

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In this commentary, Paul De Grauwe traces the origins of the turmoil in the global financial system and explores how to get out of this bad equilibrium. In his view, there is only one way: the governments of the major countries (US, UK, the eurozone, possibly Japan) must take over their banking systems (or at least the significant banks). Governments are the only institutions that can solve the co-ordination failure at the heart of the liquidity crisis. They can do this because once the banks are in the hands of the state, they can be ordered to trust each other and to lend to each other. The faster governments take these steps the better.