Governments lunged into the nationalization game in the autumn of 2008, when the financial crisis shredded banks alive. The novel coronavirus crisis will force them to make a repeat performance.
But this time, it won’t be largely limited to financial players. The full weight of the state will be required to keep many of the big companies alive and its presence may not be a bad thing, morally speaking, even though the prospect of government ownership will horrify many executives. The presence of governments in boardrooms might temper some of the greediest aspects of shareholder capitalism.
The collapse of Lehman Brothers in September, 2008, was the trigger event for bank rescues. In Britain, to take but one example, Royal Bank of Scotland (briefly the world’s biggest bank), Lloyds Bank, Northern Rock and Bradford & Bingley came under government control.
The capital and loans injected into the banks cost the British taxpayer some £137-billion. The outlays have been largely recouped, though the RBS investment is still under water and the bank remains 62-per-cent owned by the government. Still, the experiment can be considered a success. A big dose of socialism left Britain with a viable banking system.
Scroll forward a dozen years and the notion of nationalization is again on the agenda, for good reason. The COVID-19 crisis, a rare twin supply-and-demand shock, is hitting every sector of the world economy, from airlines and car makers to banks and food processors. The pain will continue because the lockdowns are not being eased quickly and might return if the infection rate shoots back up, as it could in the absence of a vaccine, effective anti-viral therapy and herd immunity.
So far, government rescue plans have relied largely on hosing out torrents of loans and grants to companies as they try to conserve cash by laying off millions of employees. The plans would make sense if the prospect of a V-shaped recovery were real. But few economists expect a quick return to normal. Companies are running out of cash. Loading up over-leveraged businesses with more more debt that they can’t repay doesn’t make a lot of sense, and would be a lousy return for the taxpayer.
Nationalizations, in full or in part, may be the best solution and the idea is far from radical. During the Asian crisis in 1997 and 1998, the Hong Kong government stabilized equity markets when it bought more than 10 per cent of the Hang Seng, the index that represents the 50 biggest companies on the Hong Kong stock market.
Larry Kudlow, the White House’s chief economics adviser, raised the notion in March when the disease started to wallop the U.S. economy. He said “if we provide assistance, we might take an equity position.”
The German government may take a 25-per-cent stake in Lufthansa in exchange for a €10-billion ($15.2-billion) bailout, according to various media reports, and the European Union’s competition commissioner, Margrethe Vestager, has urged governments to take stakes in leading companies to prevent Chinese investors from buying them at knockdown prices. The Scottish government said it might nationalize some companies. Italy nationalized Alitalia in March after the coronavirus crisis made its planned sale impossible.
Nationalizing companies is not just about saving them. Many companies, such as airlines and department stores, face existential threats and their bosses are putting enormous pressure on governments to end the quarantines so they can get their employees back to work and selling products.
Profits, not employee health, seem to be the goal in some cases. A few factories that have reopened, such as the meat-packing plants, have seen an explosion of COVID-19 cases among their workers. Nationalizations could take the pressure off companies to force their employees to return to work before it is absolutely safe to do so. A nationalized company would not go out of business if liquidity dries up in the next quarter.
Nationalizations would also come with conditions that would remove the worst excesses of capitalism. No government would allow a taxpayer-supported company to pay executives lavish bonuses or launch monster share buyback programs. Some companies are in trouble today precisely because they spent too much money on buybacks, leaving them with too much debt and too little cash. Governments could also insist that companies beef up their carbon-reduction and sustainability plans.
Nationalizations do not mean socialism has won. Companies can be reprivatized as soon as market conditions improve, as most of the British banks were after the financial crisis subsided. The effort to protect public health and find a way to stop COVID-19 has been described as a world war. It is not a war that can be fought by capitalism alone.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.