Zombie Banking- Keeping Our American Financial Institutions Alive

It's no secret that the American economy needs help, or that the national deficit needs more than just time to recover from all of the spending. Had it not been for the fact that millions of American tax dollars were wasted on what was originally thought to be a WMD (Weapons of Mass Destruction) investigation turned into national controversy; our financial institutions wouldn't be as depleted as they are today. So what's all of this talk about "bank nationalization", and why is it a threat for American account holders?

Ben Bernanke, Chairman for the Federal Reserve, says nationalization happens "when the government seizes the bank and zeros out the shareholders and begins to manage and run the bank. And, we don't plan anything like that." Financial institutions such as Citigroup and Bank of America are struggling to stay afloat in today's economy. With foreclosures and unemployment on the rise, Americans are literally living off of their savings and retirement accounts. If nationalization happens the government steps in to rescue the failing institution, zeros out the shareholders' interest, and basically "becomes the bank". All funds kept and deposited into that bank will now be available for government use- your money is locked in once you deposit it. Will you be able to cash out? Consult your financial advisor on how you should approach this.

Remember the "Sweden Solution" in the 1990's? It's the perfect example of nationalization in that the government paid off the banks' debts in return for stock interests. Current terminology for this phenomenon is "zombie banks". A zombie bank is an institution that has a weak financial pulse, and relies on government resuscitation to stay alive. Paul Krugman, winner of the Nobel Prize, argues that AIG best represents a zombie bank.

Pondering the thought of temporary nationalization on financial institutions like AIG would prove to be very dangerous and risky. This is because AIG is a global leader in the world of financing, and similar to the American economy, in dire need of a bailout. If not, the whole market could crash and send a ripple of financial destruction around the world.

The Obama administration is evaluating several solutions for developing an economic recovery, but first they need to know how many and which banks are falling behind in- stocks, loan payments, account write-offs, etc. They call this phase a "stress test", in that once the evaluation is over, we will be able to have a clear picture of which banks require more capital to generate production. One option could be a conversion of preferred shares to government owned common shares. Does this mean bigger tax breaks for American people, or the opposite, more taxation on the American people?

The best solution, says Alan Greenspan- Former Chairman for the Federal Reserve, is to leave it in the hands of the F.D.I.C. (Federal Deposit Insurance Corporation). Banks will still hold partial responsibility for their bad debts and private investors will have an opportunity to buy the cleaned-up financial institution.