NEW YORK In a sign of how deeply the financial crisis has transformed America, Republicans who embrace the sanctity of free markets are supporting some form of a U.S. government takeover of increasingly insolvent banks.
Alan Greenspan may have given Republicans the political cover they need to consider nationalizing U.S. banks when the former Federal Reserve chairman joined a growing list of experts who suggest nationalization is inevitable.
Opinion-makers are looking to Britain, Germany and Sweden for models of how to swiftly shore up banks whose negative net worth threatens to exacerbate a recession featuring 7.6 percent unemployment -- the highest rate since 1992.
"It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," Greenspan told the Financial Times in comments published on Wednesday.
"I understand that once in a hundred years this is what you do," said Greenspan, a champion of free markets who is revered by many influential Republicans.
Republicans typically stand for small government and deregulation, but ideology has a way of being put aside in a crisis. Greenspan has acknowledged he was wrong to oppose some forms of market regulation.
If President Barack Obama, a Democrat, is inclined to nationalize the banks -- and the bank rescue plan outlined by Treasury Secretary Timothy Geithner leaves that question unanswered -- he may need greater support than the opposition party has shown so far in his young presidency.
None of the Republicans in the House of Representatives and only three in the Senate supported the $787 billion (553 billion pounds) economic stimulus plan Obama signed into law on Tuesday.
Experts say a meaningful bank nationalization -- one that would involve the federal government taking a majority stake in hundreds of banks -- would cost more than the $350 billion available to Obama under the second half of the Troubled Asset Relief Program (TARP).
On top of that, the United States is considering expensive bailouts of the auto industry ($39 billion) and the housing market ($275 billion) at a time when the Republican minority is howling about the cost to taxpayers.
Republican Senator Lindsey Graham, who is close to losing presidential candidate Senator John McCain, told Reuters on Wednesday nationalization is an option for dealing with troubled U.S. banks if they fail Geithner's "stress test."
But Graham warned against the Japanese example of piecemeal measures taken in the 1990s, which he called "throwing good money after bad. ... That is what we've been doing quite frankly and we need to stop that," Graham said.
JAPAN VS. SWEDEN
The counter to the Japanese model is Sweden, which took expensive and painful steps in the 1990s that allowed its banks to avoid the worst of the current credit crunch.
The Swedish economy went into recession for three years and bank shareholders lost almost all their money. Analysts estimate the cost was about 2.1 percent of Sweden's gross domestic product, which for the United States would amount to about $300 billion.
In more laissez-faire Britain, the government has taken a 70 percent stake in Royal Bank of Scotland and smaller holdings in other banks under a bailout scheme that also leaves the taxpayers exposed.
Germany, another country wary of state intervention, on Wednesday moved closer to forced bank nationalizations by approving a draft law that allows the state to expropriate shareholders in domestic banks.
In America, investors and academics are debating not whether to nationalize but when and how.
"The opponents of nationalization are becoming fewer and fewer. I believe Geithner's plan eventually is a Trojan horse for future nationalization," said Daniel Alpert, managing director of Westwood Capital in New York.
"If we actually do this, within a relatively short period of time opportunity investors are going to want in and take an equity position if the federal government stands behind the bank," Alpert said.
Lawrence White, a professor at New York University's Stern School of Business, said it was too late for the taxpayers to see a profit -- "These are just big negative holes that need to be filled" -- but added that the United States successfully nationalized banks in the 1930s and during the savings and loan crisis 20 years ago.
"The process works," White said. "The difficulty arises when you're dealing with a large depository institution -- a Citigroup or a Bank of America."
(Additional reporting by Susan Cornwell in Washington; editing by Todd Eastham)