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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