Nationalization and Democracy

More extra-credit reading while on spring break: Sanjiv Gupta has an article at The Huffington Post about the relationship between the financial crisis, our banking sector, and democracy. The central question, as I see it, is an old one: how to ensure that a democratic political system is not undermined by a non-democratic economic system. Gupta suggests, as one possible step, a national credit union to compete with private-sector banks. To think about this in detail, we’d have to think about why we (most of us, including me) instinctively think that the following the profit motive is generally the right way to allocate capital. That’s something I hope to devote more space to later.

10 thoughts on “Nationalization and Democracy

  1. He makes great points. The government should own all businesses so that we can be sure they are run in the public interest.

    It is truly amazing that nobody has thought of this before.

  2. Sir, this discussion would be very welcome, and you have touched on it earlier.

    In particular, when you do post, perhaps you could discuss the different types of functions that banks provide:

    Retail services (check clearing, point-of-sale transactions, etc.)
    Gathering capital (deposits)
    Allocating capital (loans)

    Also, with regard to allocation of capital, perhaps a discussion of _types_ of loans would be helpful. Could it be true that certain types of loans (e.g. basic home mortgages) do not require “financial creativity”?

    In other words, the question may not simply be “to privatize or not to privatize?”, but perhaps “which functions (if any) to privatize, and how to link the public and private elements together?”

    Also, if govt. were given these powers, how to address the political problem of controlling these new powers?

  3. In an efficient economy, profits are supposed to go to zero anyway. That means that the previously existing financial system was not efficient. It would make sense that having more non-profit institutions would improve this.

    Alternavitely, one could say that being “too big to fail” represents a huge externality of risk, also resulting in inefficiency. As Gupta argues, this destroys the “profit motive” of financial players, as they get paid win or lose.

  4. Mr. Kwak, please do explain, because I seem to be in the minority on this one.

    That’s not to suggest that I believe that a profit motive should never determine how investment capital is allocated, but it is far from obvious to me that it is the only, or the even best, way in all cases (i.e. no matter what the real-world consequences).

  5. It is good that someone is raising this. Ben Bernanke wants bankers to get back to making safe loans (see the comments under the “Political Will” post). It isn’t going to happen. Even if some Americans and American businesses would be eligible for such loans, they no longer trust lending institutions, and they won’t be seeking credit.

    There has been plenty of talk about creating a “Bad Bank” to cordon off all that has gone wrong in the US finance system. What is truly needed is a “Good Bank” – government backed but not run – that ordinary people will trust and do business with. A bank that will lend to creditworthy businesses across the economy, not to speculators. Such “Peoples’ Banks” have been very successful around the world in bringing arrogant privately-run banks to heel. Doubtless this will upset passionate supporters of the free-market, but the alternative is an ugly, protracted stagnation.

  6. Political power was private. It was called monarchy and the monarchists railed against “mob rule.” The way democracy works is that power is pushed down to the lowest and therefore most accountable level. Since the monetary system is already a publicly supported utility, its management will eventually have to be as well. Therefore a public banking system wouldn’t be one huge national bank, but that banks would be an integral function of the various levels of government, so that customers would bank with the systems whose profits helped to fund the services they mostly used. If people understand that money is a public utility, like a road system, then they wouldn’t be inclined to drain value out of their communities and environment to put in a bank. As it currently is, every aspect of life is monetized and it is only to the banking system’s advantage.

  7. Perhaps the government should own all businesses for which there in an implicit (and explicit) guarantee from failure provided by said government.

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