Washington, Wall Street Buzzing About Prospect of Bank Nationalization

Rumors of a plan to nationalize U.S. banks have fueled debate this week in Washington and on Wall Street over how far the Obama administration will go to rescue the financial industry, but lawmakers and economists are divided over whether such takeovers are likely or necessary.

Business consultant Chester Elton told FOX News that nationalizing the banks is safe for the banks' clients because the government can guarantee all the deposits, but isn't an option favored by most Americans, who prefer the competition of the free market.

"I think what people are looking for is a little more oversight," he said. "I don't think they're looking for the national bank intervention where now government really does control so much of your life that you don't have choices when it comes to investments and deposits. I think that's premature."

The idea, however, is being raised by an unlikely mix of lawmakers, including Sen. Lindsey Graham, a conservative Republican from South Carolina.

"I'm very much afraid that any program to salvage the banks is going to require the government," he said on ABC's "This Week" last Sunday. "I would not take off the idea of the nationalizing the banks."

Joining Graham in talking up the idea this week -- and proving that politics can make for strange bedfellows -- were Senate Banking Committee Chairman Christopher Dodd and former Federal Reserve Chairman Alan Greenspan, who both said that banks may have to be temporarily nationalized to help lenders such as Citigroup and Bank of America survive.

"I don't welcome that at all, but I could see how it's possible it may happen," Dodd said on Bloomberg's "Political Capital with Al Hunt," to be broadcast this weekend. "I'm concerned we may end up having to do that, at least for a short time."

Greenspan told the Financial Times, "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring. I understand that once in a hundred years this is what you do."

The stocks of Bank of America and Citigroup, which have received $90 billion in federal aid in the past four months, fell sharply Friday during mid-day trading, presumably on fears they may be nationalized, but they rebounded somewhat at the close after the White House insisted it's not trying to take over the two ailing financial institutions.

"This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," White House press secretary Robert Gibbs said.

Some lawmakers have seemed to vacillate on the issue of bank nationalization.

Sen. Chuck Schumer, D-N.Y., rejected the idea on the same program where Graham suggested he was open to it.

"I think government is not good at making these decisions as to who gets loans and how this happens," Schumer said.

But Schumer elaborated on his comments Friday by telling the Huffington Post that there are good and bad ways to nationalize banks and that he favors the former.

"It should be the last arrow in the quiver," he said "Bad nationalization is when the government takes over these institutions and runs them for a long period of time. I don't think this is a good idea."