Esoteric Dissertations from a One-Track Mind

February 25, 2009

Bank Re-privatization?

Filed under: capitalism, economy — Tags: , , , — codesmithy @ 9:50 am

The growing consensus seems to be that banks will be nationalized. The case for nationalizing banks is pretty much a done deal as far as economists are concerned.  Krugman lays out the case fairly well.  I hate the term “stockholders” in this context, because it isn’t really stockholders that are the problem, at least directly.  The problem is with the executives of the banking companies and the ridiculous moral hazard they are faced with.  Society has an incentive to keep these financial institutions afloat.  The executives have an incentive to run the businesses into the ground precisely because they know society will not allow these institutions to fail.  

Why not pay exorbitant bonuses to yourself as your company is losing money hand-over-fist?  Might as well do it now while you still can.  It is precisely this perverse incentive for those who actually run the company that necessitates a government intervention, especially if the institution is FDIC insured.

As such, it is an illusion to say stockholders control a company.  I’m a stockholder and in many cases the ownership is indirect through mutual funds.  It is a complete illusion to say I exercise any power in the corporations in which I own a stake.  Myself and stockholders like me theoretically have power but it is too dilute.  Locking me out from benefits of a bailout is nothing compared to the executives.  However, saying so requires an admission that there is a corporate master class, and such an admission is not considered polite when you are an academic talking to the proles in the New York Times.

Regardless, the nationalization that is proposed is always temporary.  Why?  I’m not saying that re-privatization is not a good idea, but I want someone to explain it to me.  And one key point I would like to see addressed is explaining how re-privatizing banks would ensure a crisis like this won’t happen again, because, to me, this current crisis seems to be a direct result of a private profit motive combined with successful lobbying.  

It is particularly galling because the alternative is so obvious.  Why not keep the banks nationalized and centralize them?  Why not lock out the for-profit motive of lending entirely?  The Federal Reserve system already effectively sets interest rates, why not just take it one step further and provide financial services directly to citizens and businesses in the form of a national bank. Citizens could deposit and obtain loans from this bank.  We could get rid of FDIC.  If people wanted to risk putting their money in private banks, fine.  But, if it goes under, the government is not going to come and bail you out.  I even imagine there are some economies of scale with such an approach, in that it may be more efficient than the current banking system.  It would also reduce the need for regulatory oversight of private banks.  At the very least, there wouldn’t be “stockholders” to screw things up.

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4 Comments »

  1. You have some excellent points here and it wouldn’t be a band thing at all to keep the banks nationalized- except for the problem is not just a bank problem, it is a government problem. As long as our government continues to staff offices with people who are either vested in the current banking system or anti-whatever department they are working on (i.e. the head of FEMA who was put at its head in order to dismantle and privatize it) then whatever fix-it we propose is only a stopgap measure to keep a total collapse from happening right now. We need a much broader changes- changes that are not just directed at the banking industry, but where the banks are concerned- if we don’t regulate them and ENFORCE the regulation we will be exactly where we are today again and again and again- because a you so adeptly pointed out they are motivated to bankrupt their companies if it means a bailout while they are receiving bonuses right and left.

    You might find this article by Arianna Huffington interesting (if you haven’t already seen it) http://www.huffingtonpost.com/arianna-huffington/the-credit-card-debt-cris_b_169657.html

    Comment by Danette Baltzer — February 25, 2009 @ 6:57 pm

    • Hi Danette,

      I would agree with you that it is not just a bank problem, it is also a government problem. I also understand that there is a prevailing ethos in this country to privatize as much as we can. Both major political parties just argue on the extent. That said, universal access to credit for things like home loans, car loans, student loans and small business loans seem relatively straightforward and are fully in the realm of public planning. I mean, the federal reserve already has de facto control over much of the lending and can put the brakes on the economy by raising interest rates. If the goal is to secure credit for the productive economy, one alternative which I haven’t heard mentioned is to develop an alternative institution, a national bank, and instead of using money to bailout failed private institutions, their assets could be consolidated into this new institution which doesn’t have to be operated on a for-profit basis.

      Yes, there are problems with corruption, but what do you think is bigger problem, public officials handing out favors to for-profit private enterprise, or an employee working for the government embezzling funds? I think the second is more tractable than the first, but I recognize people could be of a different opinion.

      Thank you for the link to Huffington’s post. I don’t have a particularly high regard for credit card companies. The documentary “Maxed Out” highlights many of problems. Although, I can only express my frustration about that topic because using a credit card for an extended line of credit is not wise. I am fully aware that floating a balance on a credit card is usually a sign of distress, but when it comes to that point, the person is already effectively bankrupt. They are just digging the hole deeper. I consider credit cards like alcohol, tobacco and gambling. Things you probably shouldn’t do or use, may be used or done responsibly, are prone to abuse, and aren’t going anywhere anytime soon. Fixing the causes of financial stress, particularly medical bills, I think would go a long ways towards fixing many of the most objectionable outcomes that cause people to get sucked into credit card hell. For me, it is a separate issue that just happens to overlap some of the same institutions and effects many of the same people who are really getting pinched right now.

      Comment by codesmithy — February 26, 2009 @ 9:17 am

  2. Well, I agree with you… there should be nationalization of the banks and the government should take charge. I also agree that the risk of the government employee embezzling from the bank is less risky than the public servant who gives hand-outs. But as Oliphant points out in his cartoon today “Everyone’s too scared of socialism.” I just don’t think that’ changed much, in spite of the fact that it is the logical way to go.

    Comment by Danette Baltzer — February 26, 2009 @ 5:43 pm

  3. Nice info! Very cool post.I have looked over your blog a few times and I love it.

    Comment by Loans — February 26, 2009 @ 6:43 pm


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