Chris is right in everything he says about nationalising the banks, and I think he’s wrong. It’s a completeness problem.

His core argument is this:

[Nationalisation] wouldn’t prevent banks losing money: these are inevitable sometimes because of complexity, bounded rationality and limited knowledge. However, when banks are nationalized, their losses would create only a very minor problem for the public finances as governments borrow money to recapitalize them*. That needn’t generate the fears of a credit crunch or financial crisis that we’ve seen recently. In this sense, nationalization would act as a circuit-breaker, preventing blow-ups at banks from damaging the rest of the economy. (Given that countries are exposed to financial crises overseas, the full benefit of this requires that banks be nationalized in all countries).

This argues for an exchange of private gain/public loss with terrible knock-on effects, for public gain/public loss, which is more balanced. You could argue that the former alternative has other remedies.

But the main problem I see is the other effects of nationalisation: costs, regulation and enterprise.

Costs are hard to control in public enterprises. Partly because of the effects of regulation, partly because they’re unbounded by the profit motive, costs tend to increase to fill the space available when next year’s budget depends on completely spending this year’s. Problems tend to be solved by more money and more management, rather than by eliminating the problems.

Regulation of public enterprises is, necessarily and rightly, more onerous than it is for the private sector. The latter needs to to focus on the prevention of abuse and dishonesty, the former needs to include both measures to prevent corruption and ostentatious displays of virtue. I don’t mean that in a bad way. Tenders to public bodies have to be ritualised in a way private buying decisions don’t.

But despite all the best efforts of those involved, corruption, or nepotism, tend to take over public allocations of funds. To be anecdotal, I was asked a few years ago to take part in a business that was to be situated in Wales. The business plan was, this bloke knew someone in the Welsh Assembly who gave out grants. That was it.

If public sector priorities took over banking, the case study for any sort of finance would become: “can I cover my ass if this goes wrong?” Worthiness would tend to take priority over business cases: you wouldn’t criticise a loan to disabled veterans, would you, you bastard?

What effect would that have on the economy?

There’s another, broader, way he’s wrong too, I think. He says:

My point here is, however, a broader one. One fact illustrates it. During the golden age of social democracy – from 1947 to 1973 – UK real total equity returns averaged 5.1% per year. If we take the fall of the Berlin wall in 1989 as its starting point, they have returned 4.9% per year in the “neoliberal” era. This alerts us to a possibility – that perhaps some social democratic policies are in the interests not just of workers but of shareholders too. Maybe the beneficiaries of neoliberalism are fewer than one might imagine.

All true, I’m sure.

But in 1973 I wore darned socks and trousers with patches, and my younger brother wore my old trousers. We lived in a three bedroom detached house in a nice cul de sac in Essex, just outside the M25 (it wasn’t yet built). That house financed the rest of my parent’s lives, a couple of decades later.

Today I wear socks that cost £5 for 5 pairs, from Tesco, and when they wear out I buy new ones, and I don’t ever see any kids with patched trousers. Torn knees in jeans became fashionable, much later. Then they meant you weren’t patching your kid’s trousers. Signals of actual poverty are never fashionable.

Meanwhile, the people making the socks and the trousers have become many times richer than they were in 1973. Chinese workers have seen their incomes rise by an average of more than 15 times. We’re richer, in terms of what we can actually consume, and so are they. Their increased wealth is more measurable than ours. I’ve never seen a graph of jean patching or sock darning.

That’s also something neoliberalism has achieved. It meant we came through a calamitous banking crisis with problems, for sure, but without the dustbowl economics and breadlines of the 1930s.

The undoubted problems of banking today could be addressed in different ways. Chris talks about a return to full reserve banking, but we don’t have fractional reserve banking, we have Basel Rules that let banks use dodgy securities as backing for loans. Maybe actual fractional reserve retail banking is worth consideration. Maybe lowering the regulatory burden but making it more effective would allow the banking sector to become more diverse, so banking failures were isolated, like failures of newsagents or engineering companies.

There’s no question we have a problem with banking. But making it run with the beige inertia of British Telecom circa 1978 isn’t the answer.

Post to Twitter

  • chris

    Thanks for those points.
    What we have here is a genuine trade-off, Nationalized banks would be inefficient and inertial. But dullness is perhaps a price to pay for avoiding a financial crisis.
    By contrast, a genuinely competitive banking system would see regular bank failures, simply because competition means some failures.
    One way to mitigate this would be to have a thriving non-bank sector, in which firms raise capital via private equity, stock markets, crowdfunding, P2P etc. If liabilities are widely held, losses on them are more bearable than if they are concentrated in leveraged banks.
    You are of course right that we are better off than in 1973, in large part because of globalization and free markets. But those forces can be bad for incumbent firms: those £1 socks have wiped out much of the UK hosiery industry. In this sense, there’s a tradeoff between free markets and good stock market returns: free markets undermine the profits of quoted companies.

  • JohnM

    “dullness is perhaps a price to pay for avoiding a financial crisis.”

    Wow! That’s some hubris. Central Planning doesn’t have a particularly glowing record for avoiding crisis.

  • JohnM has a reasonable point above, but it is also better to be the UK with occasional crashes than Spain – which does have nationalised banks, though not all are such, and is an over-governed, over-regulated economic basket case.

    Wiping out the hosiery industry is a good thing, disruptive innovation is good, incumbents being toppled by upstarts is excellent. These are all features, not bugs. The profits of quoted companies are a small piece of the mosaic.

  • Gene

    Anyone advocating for nationalization of banks is also arguing for the politicization of banks. Those arguing for nationalization had better hope that they are among the favored groups that will, sooner or later, be made the beneficiaries of those banks’ services, or they’ll come to regret it.