Nationalising banks isn’t a bad idea

1:54 pm - December 5th 2008

by Chris Dillow    

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Seamus Milne says it’s time to fully nationalize the banks. Leaving ideology aside, it’s not obvious that this is a stinkingly bad idea.
For one thing, Seamus is right that the measures taken so far have not worked. As the Bank of England says today:

Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult. The Committee noted that it was unlikely that a normal volume of lending would be restored without further measures.

The simple case for nationalizing banks is that they would be able to raise cash much more cheaply and easily than they can now; before today’s Bank Rate cut, 3 month Libor was 3.8% whilst the 3 month T-bill rate was just 1.7%. This would almost automatically allow them to increase cheap lending.

And a lot of conventional arguments against nationalization are just plain wrong.

‘Government has no expertise in managing banks’
Nor do existing bank bosses. That’s why we are in the mess we are.

‘Nationalization reduces competition’
The private sector solution to our crisis also entails a loss of competition; the Lloyds TSB-HBOS merger would never have been tolerated in normal times. And even in the best of times, competition between the banks wasn’t great.

‘Nationalization reduces innovation’
It’s innovation – all those CDOs – that got us into this mess. By contrast, the innovation that would be useful – Shiller-type insurance against macroeconomic disasters – has not occurred in part because private sector financial firms cannot appropriate the large social benefits that they would bring. Maybe public ownership would help solve this public goods problem.

‘Nationalization leads to bad deals for customers’
Few customers, however, are happy with banks today. And my personal experience – from looking for somewhere to deposit the money raised from selling my flat a few months ago – suggests that National Savings are at least as efficient as any private sector bank.

‘Nationalization would cause lending to become politicized’
It would be nice to have any lending, politically motivated or not. But any reasonable arms-length structure would address this problem. After all, the BBC is in effect nationalized but operationally independent.

So, full-scale nationalization is not a stupid idea. Better still, it might not be an expensive one. As stock markets and the economy recover, it might be possible to privatize the banks at a profit sometime in the next few years. How else is government borrowing to come down?

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About the author
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Reader comments

I am not one of those who feels our access to debt is the root problem and
It seems to me that it is a less regulated not amore regulated system we need. You will note that the Insurance Companies are weathering the storm imperturbably and this is because of the extremely fluid competition . Only AIG which acted like a bank has suffered a bank fate and that’s because it was underwriting bank debt .

More smaller and free-er would have kept us safer and we should work towards that . but we start from where we are .I see no case for nationalising the specialist and international services the City offers . If it cannot make money it should die so we have to be clear which banks we are discussing .
There is a weak but not absurd case for nationalising High Street Domestic Banking for Private Consumers . I am highly horrified at the idea the state should play at Commercial credit which would turn the economy into an essentially state controlled dead land . We cannot afford that
You are wrong to dismiss the awfulness of nationalisation . It does make stupid dull expensive and political companies but is this worse than what we have ? Not much I agree . and normal domestic banking could be handled like a Utility .Its not a stupid idea but unless you think access to debt is the silver bullet its too much for too little

Nationalization still is the nuclear option though. I am more concerned by the government’s failure to threaten to cap interest rates and impose a statutory duty to lend. Banks would be a lot more co-operative if they received similar treatment to local authorities.

James, if you did that you might as well nationalise them. Telling private banks to stay solvent while telling them how to lend out money is a recipe for disaster. At least, if they are nationalised they don’t have to stay solvent. Anyone for printing more money!?

Nick is absolutely right. Governments are a back-up. If you make them the front-line, then you have no back-up except appropriation, defaulting, and printing money.

Besides which I’m pretty sure nationalising all the banks would be illegal under European law.

Lastly – it’s Seumas Milne. Unless you were being ironic about the Grauniad’s editorial style…

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