Business | Opinion
Is nationalisation the answer?
Recent events have been a brutal reminder of banking's central contradiction.
- By Tony Jackson, Financial Times
- Published: 23:50 October 14, 2008
Why not nationalise the banks and have done with it? Some countries have already gone part of the way, and Iceland all of it. Why not go the whole hog and make the arrangement permanent?
Recent events, after all, have been a brutal reminder of banking's central contradiction: heads the shareholders win, tails the taxpayers lose. Why not resolve it by making the two groups identical?
This is not a socialist argument, or need not be. Banking is sui generis, in the sense of being an essential utility with periodic tendencies to collapse. This reverses the usual burden of proof. The case must be made for allowing it private status in the first place. Public banks, after all, are scarcely a socialist invention. The Victorians spotted that state-run savings banks were a cheap way to finance government spending.
The UK's Post Office Savings Bank was set up by William Gladstone as finance minister in 1861.
Germany's savings banks, the Sparkassen, are still largely state-controlled. Japan Post, privatised only last year, remains one of the biggest deposit takers in the world.
Japan Post, though, exemplifies a flaw in the argument. If too much of the nation's savings goes into state coffers, there is not enough commercial credit to go round.
And as Japan Post also showed, non-commercial lending is subject to political distortion. If the natives of a particular region are getting restless, give them a few more redundant bridges and public buildings - paid for out of their savings.
Independence
To address that, some governments have given state banks operating independence, as when the big French banks were nationalised after World War II. And in Germany, most of the Landesbanken are in effect the commercial arms of the Sparkassen.
Observe the results. In the early 1990s, the still state-owned Credit Lyonnais blew $5 billion on Hollywood ventures and had to be bailed out by its taxpayer owners. Last year, Saxony's Landesbank, Sachsen LB, was one of the first German banks to disclose big losses on credit derivatives.
And this is the crux of it. Diehard socialists will say banking is merely a branch of old-style central planning. But in reality, it is a process of controlled risk-taking - the job of the trained loan officer, not the civil servant. And while the state can certainly operate such a bank, there is no evidence it is a better owner. In systemic terms, it may well be worse.
Recall that throughout the credit bubble, shareholders made no attempt to restrain the banks in their headlong stampede for growth. But neither did governments.
Central banks made warning noises from time to time, but politicians were notably silent. For as the banks' profits mushroomed, so did tax revenues. That situation would scarcely be improved by governments receiving the whole of the banks' profits, rather than a portion. And whereas institutional shareholders are theoretically in it for the long haul, governments have difficulty seeing beyond the next election.
Granted, for taxpayers to receive the whole of banks' profits would be better compensation for the risks they run. And if those profits were smaller - if the banks were run purely as utilities rather than casinos - the risks would be smaller too.
We should also recall that not all public banks have behaved badly. For every Credit Lyonnaise there is a BNP, which did a respectable job when state-owned. And while some of the Landesbanken lost the plot in the credit bubble, most did not.
All the same, we must conclude - perhaps regretfully - that permanent nationalisation is not the answer. It would perhaps do less harm than some might fear. But it would not do much good either. So we are left with the intractable problem of how to protect the public against the periodic insanities of private banking. The answer is certainly not more regulation, at least as currently devised and applied.
For it cannot be too often stated that the worst damage caused by the banks this time came from successful circumvention of the rules. It might have seemed sensible for the Basel Accords to require banks to hold a certain amount of equity against loans. The upshot was disastrous.
For since this constituted a tiresome curb on growth, the banks set about creating quasi-loans which, while still equivalently profitable, did not count under the rules. Hence the explosion of credit derivatives, off-balance sheet vehicles and the rest.
Still, let us not despair. By the time this temporary phase of nationalisation is over, governments will have had an intensive course in banking at close quarters. Armed with that experience, they must come up with something smarter. If they cannot, they had better not reprivatise at all.
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