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December 04, 2008

Comments

john b

"Nor do existing bank bosses. That’s why we are in the mess we are."

Hmm. HSBC, Lloyds, Santander and Co-Op seem to have been managed reasonably well; and the ones which have been managed badly are already state-controlled.

[the state of Qatar, in Barclays' case, but let's let that one slide...]

Luis Enrique

Does it matter to you argument which kind of bank you are talking about? Are the arguments different for a deposit taking, mortgage and business lending bank as opposed to an investment bank?

I'm trying to think what the counter arguments are. With the non-investment banks, most obviously I suppose, the risk is that banks would start making bad loans and would be less willing to pull the plug on poor performers, racking up hidden losses that would be born by the tax payer. Or that operational efficiency in general would suffer, so what the spread between borrowing and lending rates would widen?

Financial innovation has a bad name right now. I'm not sure it's the culprit. For example, if you buy the argument that agency/ownership and incentive problems are at the root of it, is blaming the instruments themselves sensible? But okay perhaps the instrument facilitated (ugh!) the crime. I guess you need to take a view on what innovations a private banking sector would introduce in the future that a state sector would not, and whether that'd be a gain or a loss.

James Young

"After all, the BBC is in effect nationalized but operationally independent."

I humbly disagree, and believe as a semi-objective observer that the BBC is now the UK governments "Ministry of propaganda and misinformation".

It got neutered by Hutton. But in reality that was just a legal screen for re-exertion of total political control.

The purpose was to prevent Auntie going off message on the Iraq war. Now it wouldn't dare to report on the claim that there were no WMD's. Self censorship is the worst kind and the BBC is full of it.

Luis Enrique

Dumb question in this context I realize, because there aren't any UK investment banks for the UK to nationalise.

dearieme

"“Government has no expertise in managing banks.” Nor do existing bank bosses."
Some bank bosses have some expertise: government has none.

Kit

"It’s innovation - all those CDOs - that got us into this mess."

The question you are not asking is why was the innovation of CDOs / securitization required? To fulfill regulations.

It was poor regulations that got us into this mess.

john b

"Dumb question in this context I realize, because there aren't any UK investment banks for the UK to nationalise."

Barclays now has the largest investment banking business of anyone except Citi (according to Matt Turner in the pub last night, which may or may not count as authoritative).

passer by

"It’s innovation - all those CDOs - that got us into this mess."

No it was the debasing of the currency, none of the CDOs ect would have really flown without a big load of social construction fiat currency to pretend itself into existence.

As for you main point, might a better solution be instead of pumping 20 billion into ZaNuLabours manifesto launch, to instead create some new debt free banks?

Bob B

The French experience with Crédit Lyonnais, a state-owned bank since 1945, is an object lesson in demonstrating that public ownership of a bank guarantees absolutely nothing:

"By July 1997, French finance minister Dominique Strauss-Kahn could admit that the bank had probably lost around Ffr100 billion, or around $17 billion, in its colossal spending spree. Independent commentators have suggested that the debacle will end up costing the French taxpayer between $20 and $30 billion."
http://www.erisk.com/Learning/CaseStudies/CreditLyonnais.asp

At one stage, in pursuit of its vaunting ambitions, the bank came to own the MGM studios in Hollywood.

Btw Dominique Strauss-Kahn is now MD of the IMF, so there. Prior to his political career, he was a professor at (the famous)École nationale d'administration (ENA) in Paris through which most of France's political elite passed as students - except for, amongst a few others, President Sarkozy.

Mark Brinkley

So if we should nationalise banks, how about land as well? Instead of having private property (which is heavily regulated by planning controls), why not just offer people long leaseholds and let the state assume ownership of the land itself? That would put a stop to all this land speculation which seems to me, at least, to be behind the current slump.

Bob B

Better still, if Downing St had to approve every market transaction nothing could possibly go wrong later.

Sam

why not just offer people long leaseholds and let the state assume ownership of the land itself? That would put a stop to all this land speculation

No it wouldn't. Leasehold property (with a typical 99 or 125-year lease) behaves in value pretty much exactly like freehold property.

The thing you're looking for is a Land Value Tax.

Bob B

News update:

John Gieve, one among several deputy governors of the BoE, has come out with an interesting regulatory proposal for applying a contra-cyclical mechanism to the capacity of the banks to lend:

"'We need some new policy instruments bridging the gap between interest rates and normal regulations to control the financial cycle,' he said.'These instruments would relate regulatory capital and liquidity requirements to the state of the overall economy.'

"Gieve pointed to Spain's system of dynamic provisioning for banks -- whereby capital requirements vary over the economic cycle -- as one effective example.

"'While the system did not prevent the Spanish property boom and bust, it did leave Spanish banks in a better position to handle the downturn. I think such a system could play a useful role,' he said.
http://uk.reuters.com/article/businessNews/idUKTRE4B50VK20081206

In Spain, as in other Eurozone countries, base interest rates are set by the European Central Bank in Frankfurt so as to maintain an average inflation rate (as measured by the harmonised Consumer Price Index) of 2% or less across the Eurozone. I was therefore interested to learn that Spain was able to vary the capital requirements of Spanish banks notwithstanding its inclusion in the Eurozone. It would seem that bank capital requirements have not been harmonised across the Eurozone.

However, I do wonder whether such a regulation would be effective in Britain with the open character of the London capital market - by repute there are more foreign banks with a presence in London than in any other of the leading global financial centres. S&M might like to comment.

gordon

passer by suggests: "...might a better solution be instead of pumping 20 billion into ZaNuLabours manifesto launch, to instead create some new debt free banks?"

I have been suggesting this since March on a US econoblog. Why burden the taxpayer with existing banks' liabilities via nationalisation? Just start up a new one.

Glenn Carver

If you would like to take an eye opening, roller coaster ride on the banking system and the Federal Reserve, read The Creature From Jekyll Island! You may also want to read Atlas Shrugged by Ayn Rand. The parasites are gaining!

BTW - Who is John Galt??

Glenn Carver

If you would like to take an eye opening, roller coaster ride on the banking system and the Federal Reserve, read The Creature From Jekyll Island! You may also want to read Atlas Shrugged by Ayn Rand. The parasites are gaining!

BTW - Who is John Galt??

Alex

Well, we know that one metric shitload of assets were accumulated by the financial sector, which falsely believed it had moved the associated risk "somewhere else" or else hedged it. A fraction somewhere around 30% of that has gone bad, at the same time as the rest has to be brought back on the financial sector's balance sheet.

Now, all other sectors - commerce, agriculture, extractive, industrial, services - require some total quantity of capital per year, to operate normally. Some years, they use much more and there is a boom; some years, much less, and there is a depression. Their surpluses are intermediated through the financial sector into their capital requirements.

Accepting these two statements, it's clear that the financial sector's capacity will be fully committed to its own problems, and therefore there will be a depression unless some other agency takes over this intermediation.

Today, the US government was able to borrow at a zero interest rate. The only investment that net savers trust appears to be government debt. Therefore, it follows that the world's capital requirements are just going to have to go via the state.

scoremore

why not just offer people long leaseholds and let the state assume ownership of the land itself? in that way they are helping to each other right?

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