Ray Hendon’s Economics Blog

All eyes should be on Rome today (Friday, Feb. 13) and tomorrow. The G7 meeting is taking place there, and the American representative, our Secretary of the Treasury, Timothy Geithner, will have his first chance to meet the finance ministers of Canada, France Germany, Italy, Japan, and the United Kingdom.(click here for an earlier review of Mr. Geithner)

The meeting is important because Mr. Geithner will be forced, to some degree, to put some meat on his proposal to salvage the American banking system. His proposal of a few days ago, as to how to spend the balance of the TARP funds, has not been greeted with any enthusiasm in America.

American banks are in horrid shape, especially our largest ones. Today, the market capitalization of our top banks is below $500 billion. Yet the International Monetary Fund estimates that the write-downs of their loan portfolios will rise to $2.2 trillion once a full accounting is required. When this happens, Mr. Geithner will be forced to step up to the task of rescuing them. But it is hard to imagine a scenario where the American taxpayer will pony up $2 trillion and not want a piece of the action. Yet “nationalization” of our banking system is not something he, or many others, want.

This state of affairs is understandable. America condones nationalization of the postal service, some parks, some forests and national monuments, but banks are a different matter. Our public sector has no experience running giant banks, and there is much resistance to trying it. Yet, we are going to be the capitalists of last resort to the giants that got us into this mess, so there will be a huge outcry to bite the bullet and take them over.

My own preference would be to nationalize them, and then set up an immediate procedure to denationalize them by breaking them up and selling them off in pieces. If they are too big to fail, as they are, then that are simply too big. We can get along without these behemoths. Local banks have served our economy well, and there is still room for large, internationally connected banks in our large trading cities. But we do not have to have banks as large and Bank of America and Citibank have become. At their current size, their mischief becomes a potential catastrophe for the entire world.

At any rate, Mr. Geithner will have his work cut out for himself as he faces his European and Pacific counterparts today and tomorrow. As Morris Goldstein, a policy analyst at the Peterson Institute for International Economics in Washington said: “There is a vacuum to be filled. The United States, as the largest global player, needs to lead the show.”

Most of the other ministers there will not have Mr. Geithner’s resistance to taking over their failed banks. The U.K. is well on its way there, now, and other will probably follow soon, as the shoes continue to fall in the banking crisis of the century.