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February 11, 2009



The "utility" banks wouldn't even need to be state owned.

Luis Enrique

Would you have to bar companies from borrowing from the unregulated banks? Otherwise, if firms all borrow from unregulated banks because, say, they offer better rates, then would the real economy still be vulnerable to financial crises?

Bob B

Experience elsewhere with state-owned banks is definitely not encouraging:

"Japan Post was a public corporation in Japan, that existed from 2003–2007, offering postal and package delivery services, banking services, and life insurance. It had over 400,000 employees and ran 24,700 post offices throughout Japan and was the nation's largest employer. One third of all Japanese government employees worked for Japan Post.

"Japan Post ran the world's largest postal savings system and was often said to be the largest holder of personal savings in the world: with ¥224 trillion ($2.1 trillion) of household assets in its yū-cho savings accounts and ¥126 trillion ($1.2 trillion) of household assets in its kampo life insurance services, its holdings account for 25 percent of household assets in Japan. Japan Post also held about ¥140 trillion (one fifth) of the Japanese national debt in the form of government bonds."

And there was Crédit Lyonnais:

"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."

Mussolini's Industrial Reconstruction Institute?

"However it was with the idea of a state planning agency that [Stuart] Holland [Labour MP for Lambeth, Vauxhall 1979-89, political assistant in Downing St to the PM 1967/8, and shadow Financial Secretary to the Treasury 1987-9] hoped to show the new possibilities open to a more just economy. He looked to the Italian example of the IRI (the Industrial Reconstruction Institute), set up by Mussolini and used by subsequent Italian governments to develop the economy. This had, of course, already been tried through the IRC (the Industrial Reorganization Corporation) set up as part of [Britain's] National Plan in 1966, but the IRC had been too small to have much effect on the British economy. A revamped IRC in the form of a National Enterprise Board would, however, have a major effect in stimulating the private sector through an active policy of state intervention and direction."
Geoffrey Foote: The Labour Party's Political Thought: A History (Palgrave 3rd edition (1997)) p.311.


Wouldn't the unregulated banks essentially be the same as hedge funds today? Not sure what the difference is that you are proposing - couldn't growth pressures still lead to the gaming of regulations in the nationalised sector regardless of ownership?


You should check out www.zopa.com for an example of how such a relatively unregulated entity can thrive even when banks are competing in the market (as opposed to becoming utilities).

The key thing is to remember that consumers will value money that fits with their social and cultural ideals (except for those individuals who can conceptualise or rationalise their own economic 'good' - i.e about 10% of the population).

Zopa feeds those who want their money to mean something else as well as earning interest (which is just a side benefit - although I have been earning a steady 7.5% for the last 3 years so the interest isn't uninteresting ; ) )

passer by

Just sell area franchises for the utility banks, the licence fees as with mobile phones ect might bring us some of our money back?


I prefer Richard Murphy's plan for what he calls "Network Banking" by analogy to "Network Rail". http://www.taxresearch.org.uk/Blog/2008/10/20/network-banking-a-radical-solution-for-the-uks-banking-crisis/

He would allow (separately regulated) financial institutions to exist outside this framework - but wouldn't allow any cross ownership between network banks and such financial institutions.

& can I just gently suggest to Bob B that whatever the precise historical performance record of state owner banks, that model must surely have risen in comparative esteem recently given the total snafu in the privately owned model.

Mike Woodhouse

I wonder what might have happened in the USA had the Glass-Steagall act not been repealed in 1999?

JIm Donovan

Putting aside the need for the utility banks to be nationalised (they don't) there's another wrinkle for you to consider: retirees. They're a big and growing voting bloc, who tend to chase the highest rate of return on deposits, They'll be cautious for a while after 2008, but the lure of an extra 2% from an unregulated institution would draw them in eventually. NZ had a financial meltdown in 1987/88 which put retirees off anything but cash deposits and property, but as the unregulated alternative finance houses grew, retirees shifted their savings there, despite regular warnings about risk. When it all went pear-shaped last year, guess what? In stepped the government, against most advice, with an insurance scheme covering any deposit-taking institution, including the supposed unregulated subsector. When retiree savings, even against advice, are invested in alternative institutions, would the governments let them fail in the next crisis (however and whenever that happens)?

Don the libertarian Democrat

I like the idea, but I think that narrow/limited purpose private banks could also be a possibility:

See here from the FT:


"What will change this behaviour is to not let it happen. Banks should be allowed to initiate only conforming, i.e., government-approved, AAA-rated mortgages and business loans. These would be long-term, fixed-rate loans with 20 per cent-down and payments below 25 per cent of income.

The government, via the Federal Financial Authority, would use tax records to verify loan payment-to-income ratios. It would also spot check collateral. Once approved, the banks would bundle and sell “their” loans within mutual funds.

Again, traditional bank runs wouldn’t arise. And today’s bank runs, which entail lenders and equity investors avoiding risky banks, wouldn’t either. Why? Because banks would bear zero risk. Mutual fund owners would bear risk, but not the banks. And these lenders would know they were buying government-approved AAA-rated loans, not Bear Stearns‘ CDOs.

This limited purpose banking is a modern version of narrow banking proposed by Frank Knight, Henry Simons, and Irving Fisher. Banks would hold deposits, cash checks, wire money, originate loans, and market mutual funds, including money market funds with no guarantee of par value redemption.

With limited purpose banking, financial crises would largely disappear. Banks would never fail, never stop originating loans, never expose the public to massive liabilities, and never see their stock values evaporate. Banks would be stable, boring economic cogs - like gas stations.

The Fed would also gain full control of the money supply. To expand the money supply, the Fed would continue buying treasuries from the public and supplying cash. But banks wouldn’t be multiplying and contracting M1 (cash plus demand deposits) based on their ever changing decisions about lending deposited funds.

Milton Friedman, who also advocated narrow banking, blamed the Depression on the Fed’s failure to offset the M1 money multiplier’s collapse. In the past year the M1 multiplier has contracted by over 40 per cent, forcing the Fed to double base money. If the multiplier shoots back up, we could see the money supply and prices explode."

Check it out.


Bring in the venture capital firms for stimulus/recovery.


Bob B

If Martin Wolf in Wednesday's FT is correct about the big problem with US banks being insolvency, not liquidity, then the administration's Troubled Asset Revocovery Programme (TARP) isn't going to work:

Btw with the Congressional approval of the US administration's Fiscal Stimulus package worth $789bn, I take it that the Archbishop of Canterbury, complete with mitre and crook, will shortly be off to America to save their souls from perdition, David Cameron will be making a statement on their lack of a moral compass, and George Osborne will be urging Pres Obama to have a session or two with a psychiatrist.


Bob, if you dropped the obsession with Credit Lyonnaise, I might actually read your comments.

Meanwhile, Chris, this sounds very Schumpeterian - combination of a core of socialist big enterprises with a periphery of rambunctious startups. Much to be said for that.


India has Public Sector and private banks competing in the market place. I'm not a professional economist, but it might be of interest to you to check with your economist friends specializing in Indian banking as to how things have worked out.

Tom James

Well I agree with Jim Donovan:

"When retiree savings, even against advice, are invested in alternative institutions, would the governments let them fail in the next crisis (however and whenever that happens)?"

If this system of state-owned/sanctioned banks and completely unregulated banks were set up it would work for a while but eventually rentiers and savers would be tempted by the *fantastic* rates of return available in the unregulated banks, and if a large unregulated bank with huge numbers of elderly pensioners invested in it went bust there would be huge pressure on any government to bail it out.

Still it's a good idea, and might ameliorate the problem of the falls in the availability of credit.

Andrew Duffin

We do in fact already have a free unregulated alternative banking system.

It will operate from a pub somewhere near you.

It will charge a very high interest rate.

Its contracts will be enforced by very large gentlemen, probably carrying baseball bats, who will call at inconvenient times.

All of the above is bad, probably, but it reflects the very high risk areas these people work in. Their customers, by and large, are those unable to borrow money anywhere else.

Bob B

"Bob, if you dropped the obsession with Credit Lyonnaise, I might actually read your comments."

My dear, Alex, please don't read any of comments of mine then you won't get upset. Even if you're bored with Credit Lyonnias, the losses of c. FFr 100bn piled up by this bank, which had been state owned since 1946, may be news to other readers. Trichet, now head of the ECB, had first to be acquitted of charges relating to the privatisation of Credit Lyonnais before taking up the appointment. The French invented a toxic bank to take over the accumulated losses of Credit Lyonnais so it could be sold off clean - the bad debts in the toxic bank will be slowly paid off by French taxpayers. The are lessons to be learned from that experience.

We need to draw obvious conclusions - state ownership of banking facilities doesn't guarantee sound banking practices. This is why Koizumi, as Japan's PM, made a point of privatising Japan Post, which had long been abused as a source of pork-barrel financing for dubious construction projects by successive LDP governments in Japan.

Mussolini's creation, the Istituto per la Ricostruzione Industriale in Italy - see Wikipedia entry - became legendary post-war for sinking finance into loss-making ventures so it was eventually wound up in 2000. Btw check out the ratio of Italy's national debt to GDP.

IMO enthusiastic advocates of nationalisation tend to overlook crucial issues of governance and management and assume that such enterprises will naturally follow their own personal political preferrences by some telepathic process.

The Morrisonian public corporations were charged by statute to have regard for the "public interest". Sadly, what that was, was not defined in the legislation so the appointed boards of public corporartion needed to divine what it was or await directives from the government, which usually had special regard to any looming election - so price increases tended to get postponed.


No, it won't be news to them because you GO ON ABOUT IT SEVERAL TIMES A DAY. Strangely, it's the one banking scandal you refer to. Strangely, the existence of the Caisse des Depots, which just chunks on as ever, doesn't get mentioned. I have no idea why you are so obsessed with this detail of 1990s French politics, but it's BORING AS HELL for everyone else.

Bob B


That's false.

Tom James

@Bob B:



That's false.

Well you've gone on about it twice today.

Just sayin'...

Bob B

"Well you've gone on about it twice today."

That's an exception. Alex evidently had insurmountable challenges in comprehending the salient issues at stake but then some are deeply moved by any passing hint that public ownership of the means of production etc is not necessarily in the interests of those its advocates claim it serves. In parts of Yorkshire, for instance, nostalgia for Socialism lingers and some still believe Blair was profoundly wrong to push for the abolition of the notorious Clause 4.


Just to note that multiple bank crisis with private banks like we are seeing now are incredibly rare (individual banks fail of course). Perhaps the process is that markets learn their own lessons and will take the own necessary steps to correct things, such corrections necessarily are not forever, but last long enough. The best thing about market solutions is that they are multiple, as no-one really knows the right balance between safety and risk, only a market can find this. There are major risks associated with a "safe" banking system, radically lower growth being one of them, as well as potential corruption.

If a non-market solution has to be imposed (for political reasons "something must be done") then my propsal is for forced equitisation of debt ability by the regulator, at the regulators whim. Essentially, if the regulator felt that a bank had inadequate reserves, the regulator could instantly (and with appropriate secrecy beforehand) require part of all the bank debt and deposits held by the bank to be converted to common equity, diluting the equity holders accordingly, and reducing the debt. Property rights are preserved of course in the event that the regulator was incorrect, the equity will have equal value to the unconverted debt. As long as this process is known about in advance then bank depositors will take care to avoid any moral hazard, probably making the process itself unecessary ever to be implemented.


I'd just like to congratulate Alex for getting an actual bespoke reply* from Bob B, rather than than the usual ctrl-c ctrl-v of links to wiki or the BBC.

(*either that or we have a Turing Test contender)


The (effectively) two-tiered banking system is exactly what Taleb has been going on about recently. Most only hear of his support for nationalization and never let him get to the part about letting hedge funds continue to operate (and never ever bailing them out).

Fiat money, and therefore core finance activities (i.e., banking deposits, basic loans) are arguably public goods. This does not mean nationalized banks must not be allowed to operate as private entities (community banks in the States are quite healthy these days - they didn't get into risks they weren't equipped to understand), but it does suggest that much like water, power, roads, and schools, smart regulations (that have large inefficiencies) are still better than leaving it wholly to the market.

Why? Black swans.

Bob B

"Just to note that multiple bank crisis with private banks like we are seeing now are incredibly rare (individual banks fail of course),"

At the risk of being told again that I'm repeating myself again, the current crisis is, amongst other issues, a hugely magnified re-run on a global scale of the Saving & Loan Association crisis in America in the 1980s and 1990s:

"The savings and loan crisis of the 1980s and 1990s (commonly referred to as the S&L crisis) was the failure of 747 savings and loan associations (S&Ls) in the United States. The ultimate cost of the crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government—that is, the U.S. taxpayer"

American regulatory authorities evidently learned absolutely nothing from that debacle - even though I learned about it in a well-reviewed, regular economics text: the 1st edition of: Incentives, by Donald Campbell (Cambridge UP 1995).

I was in the branch of my local bank yesterday, at their friendly invitation, to meet my new "account manager" - they change with remarkable frequency. Now this is the bank which acquired the stricken HBOS in the nick of time with the result that the newly merged banks are now 43% owned by taxpayers and have the largest market share of the retail bank market in Britain. There are suppressed competition policy issues in consequence.

By the entrance of the bank, displayed in a dispenser, was a collection of take-one pamphlets, supposedly to reassure bank customers about the changes, with the headline: Business as usual.

I joke not.

Try Simon Hoggart's recent Parliamentary Sketch: We're sorry say bankers. Well, sort of

rolex yachtmaster

And a lot of it reflects a switch from bank deposits to securities; foreigners “other investments” in the UK, http://www.watchgy.com/ mostly bank deposits, fell by £143.2bn in Q1. And of course there’s no guarantee such buying will continue.

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