For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw. The megabanks are too big to fail, but they aren't too big to reorganize as federal institutions serving the public interest.
Although nationalization sounds like socialism, it is actually what is supposed to happen under our capitalist system when a major bank goes bankrupt. The bank is put into receivership under the FDIC, which takes it over.
What fits the socialist label more, in fact, is the TARP bank bailout, sometimes called "welfare for the rich." The banks' losses and risks have been socialized, but the profits have not. The bankers have been feasting on our dime without sharing the spread.
And that was before ForeclosureGate - the uncovering of massive fraud in the foreclosure process. Investors are now suing to put defective loans back on bank balance sheets. If they win, the banks will be hopelessly under water.
"The unraveling of the 'foreclosure-gate' could mean banking crisis 2.0," warned economist Dian Chu on October 21, 2010.
