All of which raises the question: if banks are failing so badly and need so much intervention, what is the point of keeping them in the private sector?
There’s one thing government can do much better than the private sector, especially in recession - raise finance cheaply. This means nationalized banks, operating with government guarantees, could raise money cheaper in wholesale markets. And it means governments find it cheaper than the private sector to inject capital (shareholders funds) into banks.
What, then, is the offsetting disadvantage of nationalized banks?
One moronic argument is that it’ll politicize lending. It needn’t. Government supporters don’t get a better service from the passport agency, win more premium bond prizes or get easier driving tests. Such examples show that it’s trivially possible to design a hands-off structure for publicly-owned services.
A less stupid answer is “worse management.”
But this is not self-evident. In principle, nationalized banks could operate in a quasi-market, competing against each other. The issue then arises: is it possible to design a contract to incentivize bank managers properly, encouraging them to make profits (that is, lend to good going concerns) without taking excessive risks?
Interestingly, the most powerful opponent of market socialism, Hayek, did not think this the decisive argument against state ownership. He granted - perhaps only for the sake of argument - that socialist managers “will be as capable and as anxious to produce cheaply as the average capitalist entrepreneur.”*
Instead, his concern was that market socialist structures would be unable (pdf) to discover the “right” market-clearing prices.
However, the private sector failed to solve these issues. It didn’t incentivize bank bosses and employees properly, and privately-owned banks failed to price assets correctly, paying way to much for mortgage assets.
The alleged failures of state ownership are therefore failures of private ownership too.
Now, I’m not arguing here for nationalizing banks. I’m just making three points.
1. Can we discuss this without ideological blinkers? On the “left” there’s a tendency to regard the failures of markets or private ownership as inherent features of the system, whilst failures of government are mere accidents. The “right” makes the opposite error.
2. Can we think about organizational and incentive design? The dominant ideology in the public and private sector is that we don’t need to do this, and that any organization just needs the right leader. Isn’t it time we thought a little more?
3. Nationalization is not the end of the story, but the start. It just opens the question: what should be the business model and organizational structure of a nationalized bank? It’s possible that the government failed to consider this adequately when it took over Northern Rock.
* p196 of this book.