State owned Banks

[ydoaPs]

What do you guys think? Apparently the state owned banks in ND give loans to local businesses at a reasonable rate and funnel the interest into the state as revenue instead of into the pockets of a CEO as profit. Should more states do this?

[CaptainPanic]

Makes a lot of sense to me.

 

A bank should be a service, and a non-profit (or profit-minimization) model suits such a role.

 

Same for insurance companies.

[Horza2002]

Sounds like a good idea to me. You borrow the money from the government, pay it back, and any interest you pay, you indirectly get the beneficts as well.

 

Although, I'm not sure how people would like the idea of the state reposessing their homes/goods if they couldn't make the repayments. I don't know, but I think people would be more upset about that than if a bank did....

[lemur]

Any form of financing, regardless of the source, has the same ultimate economic effect imo. It helps people expand their economic activities and by doing so, makes them that much more dependent on maintaining the supply-chain and distribution networks formed as a result. Take an example of a subsistence farmer who manages to provide enough food for herself and her family without engaging in trade. Then she realizes she can buy a tractor on credit and farm cash-crops to pay back the tractor so she does. Let's say this process goes well and she keeps expanding her business making lots of revenue, re-investing it, and increasing her family's consumption lifestyle. Everything is great until recession comes and suddenly she can no longer afford to pay the second mortgage on her farm and she loses her property and has to move to subsidized public housing in a city after declaring bankruptcy. At that point, will she wish that she had not taken bank loans, even if that meant continuing to farm at a subsistence level?

 

Commercial trade has many benefits but people should also be aware of the risks. Face it, what most investors are doing is attempting to extract money from businesses just by lending them money. The same is true of workers. Neither cares if the enterprise goes out of business or produces in a wasteful or otherwise unethical manner as long as their income keeps increasing. So the more banks or other investors inject capital into enterprises, the more vulnerable those enterprises become to market fluctuations because of their dependence on financing and labor inputs. So maybe it is better for businesses to build up slowly on their own instead of using finance to grow rapidly. The question is how difficult it has become to do this as a result of modern standards/levels of economic interdependency - and should these standards/levels be reduced and, if so, how?

Edited March 17, 2011 by lemur

[CaptainPanic]

Face it, what most investors are doing is attempting to extract money from businesses just by lending them money.

 

The real question is how much money investors should be allowed to extract. They aren't limited in any way at the moment. Right now they're extracting so much that the 'financial' sector is one of the main sectors in the world.

 

What if it doubles in size again, and becomes twice as big, and 'extracts' twice the amount of money it does today? Or 10 times?

 

Please note that I'm not saying that the concept of investment bankers is wrong. I'm saying that it's a good idea what ydoaPs proposes: make banks state-owned and remove their profit-incentive. I'm glad you mentioned the word "extract".

[ydoaPs]

Sounds like a good idea to me. You borrow the money from the government, pay it back, and any interest you pay, you indirectly get the beneficts as well.

 

Although, I'm not sure how people would like the idea of the state reposessing their homes/goods if they couldn't make the repayments. I don't know, but I think people would be more upset about that than if a bank did....

AFAIK, the state owned banks in ND don't do mortgages; they provide capital loans for local business ventures.

 

Please note that I'm not saying that the concept of investment bankers is wrong. I'm saying that it's a good idea what ydoaPs proposes: make banks state-owned and remove their profit-incentive. I'm glad you mentioned the word "extract".

It should also be noted that I'm not advocating government takeover of banks. I think what is discussed in the video is quite reasonable, however.

[ecoli]

Ok, but where would the capital come from?

 

My intuition is that this is not a good idea, because states can't bail themselves out and this is sort of like capital creation. Unless it's prohibited by state constitution though, it doesn't sound illegal.

[CaptainPanic]

It should also be noted that I'm not advocating government takeover of banks. I think what is discussed in the video is quite reasonable, however.

Umm... yeah... I may just have put some words into your mouth. Sorry.

 

Personally, I think that this proposal is good.

But I also think that such a state-bank for long term projects would out-compete normal banks, because it would ask a lower interest rate, or would even give loans that no other bank would give. It would effectively take over quite a significant portion of the market. That would have the same net-effect as nationalizing some banks.

 

From a political and marketing point of view, I would definitely recommend to set up a new 'investment bank', rather than nationalizing one. Nationalizing sounds very 'communist'. But creating an investment bank sounds very 'capitalist'. And we all know that capitalism is the best.

[TonyMcC]

In the uk several years ago the government, via the Post Office, set up a banking system called "National Girobank". It provided convenient and cheap banking, particularly for "the working man". I was one of its customers and was more than satisfied with the service. It also caused a big stir and shake up of the commercial banks.

However, after some years it was sold off to the private sector.

When I read about the salaries and bonuses presently paid to banking executives and see that my meagre savings don't even earn enough to keep pace with inflation then I wish the government would step in again and set up some sensible and convenient banking system - I would join it as a customer like a shot! http://en.wikipedia.org/wiki/Girobank

Edited March 17, 2011 by TonyMcC

[lemur]

The real question is how much money investors should be allowed to extract. They aren't limited in any way at the moment. Right now they're extracting so much that the 'financial' sector is one of the main sectors in the world.

They are limited by spending (government and private) and GDP growth (which is basically the same thing, right?). It is logical that financial investment has grown as a function of industrialization, economies of scale, etc. What isn't so logical is that free market competition has not driven businesses to utmost levels of cost-efficiency where there would be practically no surplus revenues to re-distribute in the first place.

 

 

What if it doubles in size again, and becomes twice as big, and 'extracts' twice the amount of money it does today? Or 10 times?

Presumably this would just create even more of the same old unwaivering pressure to make and spend money in every possible way. The question is whether the general economic results of this are favorable. Is it really good to have a continuously expanding economy that generates increasing dissatisfaction as part of its drive to increase revenues?

 

Please note that I'm not saying that the concept of investment bankers is wrong. I'm saying that it's a good idea what ydoaPs proposes: make banks state-owned and remove their profit-incentive. I'm glad you mentioned the word "extract".

Why would public-pressure solve anything? Wouldn't that just lead to even more insistence on pushing economic activity to increasingly higher levels? Can you actually ever imagine the public urging government to reduce GDP to give people a chance to find peace-of-mind and satisfaction in simple activities that don't cost anything or generate any revenue? I think at least with decentralized finance, private spending is free to save money when it wants to. Once it becomes "state finance," majoritarian public opinion could insist on stoking economic growth just because so many people are immature and manage their households inefficiently.

 

edit: Actually, it may be worthwhile for government to create forms of debt-mitigation besides bankruptcy. That way, borrowers could lose their credit rating more gradually instead of being able to keep borrowing at full steam until they're up to their necks in debt.

 

 

Edited March 17, 2011 by lemur

[Mr Skeptic]

It would need some rigorous policies to keep the government from looting their own banks, like they do with so many other pools of money. Other than that, it is definitely a good idea and would put some good old market pressure on other banks to improve their own quality.

[jackson33]

So long as it's a State approved operation, that can later be disapproved, I see nothing politically wrong with the idea. However I would suggest the NDS Bank, is and has been in a strong Republican/Conservative State since it's admittance as a State and any current figures mentioned in the original link, are based on their relaxed energy laws and the current "oil boom"...

 

Any program IMO, is as efficient or inefficient as the regulations that control the program, be it in the private or public sector. For instance in California, regulations would be controlled by three major metropolitan areas (LA, SF, SD), extremely liberal having a majority in their State Legislature and would direct any legislation (regulation) toward their benefit. An additional problem would be in those States with mandatory annual balanced budgets and any losses incurred by the Bank and it's branches, would be included in that budget, profit or losses. In the private sector, public banks are usually owned, invested in, by local people and suffer the losses or profits, not everyone in the State.

[lemur]

Maybe this is overgeneralizing this topic, but why shouldn't private finance be allowed to constrain capital flows within free markets to a minimum? This seems like the only way for free markets to ever give the poorest of the poor a chance to participate. If government would control and thus insist on lending, wouldn't it just endless fund the investments that sustain class-stratification? My sense is that if banks lent very restrictively for a period of time, businesses and individuals would gradually have to make due with increasingly less revenues until the playing field was level with the poor. If this is what a free market does naturally, why shouldn't it be allowed to do so?

[Marat]

When the big banks gambled and lost badly on their risky investments in 2008, the U.S. taxpayer had to step in and rescue them to preserve the financial system, but the banks then repaid this favor by refusing to lend money and instead hoarding it for themselves -- thus stalling the recovery -- and then they began paying massive bonuses once again to their executives with the public's money. A far better solution to the crisis would have been for the U.S. government to have bought up all the failing banks at their fair market value at the time (which was next to nothing), thus acting consistently with the XIVth Amendment, so then the banks would have been under public control. This would have meant that banks would then have loaned money in the public interest and there would have been no waste of scarce financial resources on bonuses for rich people.

 

In the way of this obvious and beneficial solution was the implication that would have had for capitalism, which no one on Wall Street would permit the government to suggest.

 

Generally, there are a huge range of dire needs in society for productive investment but a great shortage of capital to answer those needs if a gigantic profit margin cannot be generated for rich investors from that investment. The dependence of the entire system on large profit margins for investment to address need ensures that the most essential human needs of society, such as those of the poor who cannot reward invested capital well with their purchases, will never be met, while the need for luxuries by the rich who can afford them will always be met.

 

This is why ghettos are always filled with armies of strong, healthy, but unemployed people in search of work, even though all around them the decaying infrastructure, the crumbling buildings, the sick old people who would prefer to live at home with home care support, positively cry out for workers to be employed to answer all these needs. But what ensures that the army of workers is never brought into connection with the massive amount of work answering basic human needs that has to be done is essentially banks, which insist on an excellent return for their capital or they will hoard it. Only government ownership of the banks and their capital can ever solve these problems.

[imatfaal]

Great post Marat. Are we getting to a point of historical imperative when the "armies of strong, healthy, but unemployed people in search of work" join together and start to ....

...sorry getting carried away there.

[jackson33]

When the big banks gambled and lost badly on their risky investments in 2008, the U.S. taxpayer had to step in and rescue them to preserve the financial system, but the banks then repaid this favor by refusing to lend money and instead hoarding it for themselves -- thus stalling the recovery -- and then they began paying massive bonuses once again to their executives with the public's money. A far better solution to the crisis would have been for the U.S. government to have bought up all the failing banks at their fair market value at the time (which was next to nothing), thus acting consistently with the XIVth Amendment, so then the banks would have been under public control. This would have meant that banks would then have loaned money in the public interest and there would have been no waste of scarce financial resources on bonuses for rich people.[/Quote]

 

Marat, do you understand during the 1990's and on into the 2000's banks were simply the "middle man" for banks making loans, Fanny/Freddy under Congressional legislative actions, bought up ALL notes fitting their criteria and banks accepted notes for people who they would not ordinarily loan money to. Yes, some, very few, banks failed or failed to meet other criteria Congress set and were forced to sell assets to other banks.

 

What you and some others here are thinking/talking about are the dozen or so major financial institutions where "derivatives" (financial instruments) were involved and took great losses as real estate values dropped in general, making those derivative drop in value. What was feared by Paulson and apparently Bush 43, was a basic run on these financial institutions from Worldwide Institutions and that bought these derivatives, that wanted to sell them. The 700B$ was to help prevent those actions. Since any financial instruments value is set by market forces, the values of those derivatives were bought by speculators, thinking Real Estate Values had bottomed. The problem was, between Bush/Obama policy, those values had NOT bottomed and the artificial bottoms suggested were breached, which is still going on today.

 

Those money managers of financial institutions that played the correct cards, thinking markets would continue to decline, or traded as "day traders", buying/selling shorts correctly, made a great deal of money, no less than many day traders buying/selling much less expensive stocks or equities. As any person working in this manner, they normally work under contract, according to their qualifications and work history and were paid according to there contract.

 

Banks simply loan money to make a profit for their investors or DEPOSITORS, not necessarily in the public interest, whomever your suggesting can decide what that actually means. Those "Big Banks" were forced to take loans in the first place, so which banks that were felt to be in trouble would not be known and for the most part all the 350B$ (TARP) lent by Paulson/Bush, has been paid back, with interest and I believe is setting in an Executive Slush Fund today held by the Federal Reserve. The 350B$ spent by Obama, I have no knowledge to where it is, other than in various preferred stocks of some banks, GM and Chrysler.

 

The other side of the argument; Since I opposed TARP to begin with, if those two or three major institutions were forced to liquidate or reorganize from natural forces (valueless stocks/no business) all assets of each would have been assumed (liabilities) or bought (business activity) by other business, no noticeable number of people would have lost jobs and the whole problem would have resolved itself in months, no different than if GM had liquidated, instead of guaranteed reorganization. Artificially created bottoms, rarely work, only creating larger problems from the same causes further down the road, IMO.

[lemur]

When the big banks gambled and lost badly on their risky investments in 2008, the U.S. taxpayer had to step in and rescue them to preserve the financial system, but the banks then repaid this favor by refusing to lend money and instead hoarding it for themselves -- thus stalling the recovery -- and then they began paying massive bonuses once again to their executives with the public's money. A far better solution to the crisis would have been for the U.S. government to have bought up all the failing banks at their fair market value at the time (which was next to nothing), thus acting consistently with the XIVth Amendment, so then the banks would have been under public control. This would have meant that banks would then have loaned money in the public interest and there would have been no waste of scarce financial resources on bonuses for rich people.

Bailing out the banks didn't make sense to me at first either, but I finally understood the logic. It has to do with the rise and fall of the real estate boom market. Once the over-funded real estate markets started collapsing, there was no way to keep them inflated/inflating without creating multi-generational balloon mortgages or something else ridiculous so they had to deflate. Once deflation starts, you don't want people to keep buying in to the market every time a house gets discounted 10% because that just slows down the depreciation process. Instead, it makes more sense to keep credit on a short leash, preferably only using it to stabilize existing mortgages by locking in the low interest rates for the long term. That way, deflation can proceed in an orderly fashion and, hopefully, the most vulnerable people will be able to get the credit they need to get by while the market resets.

 

The Bush administration seemed to really know what it was doing by giving all the money to the banks since banks would have the strongest interest in withholding the money until prices had re-stabilized. Now, the question is just when prices will bottom out and buyers will become interested in investing again. It may still be a while though, since my impression is that many many people are still in the mode of trying to convince others that "now is the time to buy" in order to cash their properties out before they further depreciate. If anything, I would call this recession a "crisis in BS" insofar as people try to BS each other into buying into a deflationary market so that they themselves can cash in on the dupes. The question is what economic foundations will emerge that are strong enough to base housing prices on? My sense is that there's still a lot of other economic uncertainty that has to be worked out before this happens, though.

 

In the way of this obvious and beneficial solution was the implication that would have had for capitalism, which no one on Wall Street would permit the government to suggest.

Nor do you seem to permit yourself to suggest it here.

 

Generally, there are a huge range of dire needs in society for productive investment but a great shortage of capital to answer those needs if a gigantic profit margin cannot be generated for rich investors from that investment. The dependence of the entire system on large profit margins for investment to address need ensures that the most essential human needs of society, such as those of the poor who cannot reward invested capital well with their purchases, will never be met, while the need for luxuries by the rich who can afford them will always be met.

The first part is true. Gigantic profit margins are demanded and if they aren't produced, investors do everything possible to obstruct deflation to ensure the wealthy and middle class are satiated before the lower classes are allowed to get access to capital to self-sustain. The second part, that luxuries for the rich (and middle class) will always be met is simply not true. For many, it may be true, but in a recessionary economy, the wealth and middle-class compete for scarce resources like everyone else and more so actually because they're at the top of the food chain.

 

Look at it like a literal food chain. If plants at the bottom are less available, there's less food for the plant-eating fish. Then the medium sized fish have to compete to eat them, which results in the big fish and sharks competing for the medium fish and each other. Ironically, humans have the ability to go from shark-level consumption to lower-levels, but instead they argue for redistributing fat from the sharks to feed to the small fish to reinvigorate the food chain. But the point of the analogy is that when spending decreases at any level, revenue/profit losses trickle up to the middle-class and the wealthy.

 

This is why ghettos are always filled with armies of strong, healthy, but unemployed people in search of work, even though all around them the decaying infrastructure, the crumbling buildings, the sick old people who would prefer to live at home with home care support, positively cry out for workers to be employed to answer all these needs. But what ensures that the army of workers is never brought into connection with the massive amount of work answering basic human needs that has to be done is essentially banks, which insist on an excellent return for their capital or they will hoard it. Only government ownership of the banks and their capital can ever solve these problems.

Great point. Who prevents poor individuals from cleaning themselves up and fixing up an old junk house to live in? Answer: property owners who would rather wait for stimulus money to revitalize the high-priced markets and then rent the houses for government subsidies. Of course, would you want to be the property owner who gives an old house away to a poor person when your neighbor owns commercial property that he's going to hold and rent for a profit once the poor person you gave your house to fixes it up and sells it for a profit?