Nationalization: Is It the Only Answer to Save Banks?

WASHINGTON, Feb. 15, 2009— -- A year ago, it would have been unthinkable: Sen. Lindsey Graham advocating a government takeover of private banks -- but that is exactly what he suggested today.

"I would not take off the idea of nationalizing the banks" from the table, Graham, R-S.C., told George Stephanopoulos on ABC's "This Week" program

"This idea of nationalizing banks is not comfortable, but I think we have gotten so many toxic assets spread throughout the banking and financial community throughout the world that we're going to have to do something that no one ever envisioned a year ago, no one likes," Graham said. "But, to me, banking and housing are the root cause of this problem. And I'm very much afraid that any program to salvage the bank is going to require the government.."

Analysts say that speaks to the depth of the nation's financial crisis, and to President Obama's ability to maneuver broadly to combat it.

"The fact that Lindsay Graham, a conservative Republican, says that nationalization should be on the table, I think underscores the sense of crisis," Stuart Rothenberg, editor of The Rothenberg Political Report, told ABC News. "And that could give the president a good deal of political capital and leeway."

Speaking on ABC's "Nightline," Obama himself dismissed the idea of a government takeover of the banks just last week.

"We want to retain a strong sense of private capital fulfilling the core investment needs of this country," Obama said.

But some prominent economists, including Nobel prize winner Paul Krugman, say nationalization is the only way out of the out of the current financial crisis, given that the nation's largest banks are now carrying a crushing half a trillion dollars in bad debt.

"The chances of your being able to do this without nationalizing at least a couple of really troubled banks are not too good," Krugman told ABC.

This week, as part of Obama's plan, the nation's banks will start to undergo what are being called "stress tests" to find out just how much trouble they are in. When those results are in, Krugman says, federal officials will have only once choice.

"They're going to go in there and do a Claude Raines from 'Casablanca': 'I'm shocked -- shocked -- to discover that these banks are in so much trouble financially.' And then seize them," Krugman said.

But they may have to find another name for it.

"The word 'nationalization' scares the hell out of people," Rep. Maxine Waters, D-Calif., said on "This Week."

To combat that, some clever advocates of nationalization have come up with alternative names, including "government receivership" and "pre-privatization."