Those of us in favor of bank nationalization don’t want to nationalize all banks, just the massively insolvent ones which are too big to fail. But let’s say that the government took over Bank of America and/or Citigroup, wiping out shareholders and probably preferred stockholders as well. What would happen to JP Morgan Chase and Wells Fargo? Would their stocks plunge in fear that they, too, might get nationalized, with their stock going to zero? And would such a plunge end up becoming a self-fulfilling prophecy?
I frankly don’t know the answer to that question, but it is something for those of us in favor of nationalization to think about. If nationalizing Citigroup would constitute a death sentence for JP Morgan and Wells Fargo, such a decision could involve a great deal of wealth destruction, given that those two banks are worth $140 billion between them.
Update: I should mention that this idea obviously comes straight from Tyler Cowen, whom I linked to earlier. But then I went out for drinks with a friend, and talked about these things, and then I watched a documentary about Helvetica, and by the time I posted this entry I knew the idea was in my head but had forgotten exactly where it had come from. Thanks to Jim Surowiecki for working it out for me. In any case, here’s how Tyler put it:
The risk is that nationalization becomes a contagious idea and spreads from one bank to the next, acting as a self-fulfilling prophecy.
Obviously, the contagious-nationalization meme is almost as contagious as nationalization itself!