Stronger credit union type institutions
Unions/local governments/etc that finally stop entrusting their funds to banks and start investing on their own. In the US, some of the most destructive PE finance is done with money from pension funds of ordinary workers.
Tax reforms - cap gains special treatment should be, if for anyone, only for entrepreneurs, not investors in securities and certainly not for fund managers.
Public banks?
I'm also thinking about whether Alperovitz has found at least a partial solution to Gintis's critique of coops. Gintis, to me, has a persuasive explanation for why the coop model fails to flourish and why so many ESOPs fail. Alperovitz's model for coops involves close ties to local governments and non-profits (like hospitals/housing-authorities) that can create stable markets.
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The government lends to/saves banks because without credit and the system of payments, the economy crashes entirely. The government should not play-pretend private equity, unless there is a very strong strategic reason to do so - like saving a crucial industrial cluster. Otherwise, it should not take risks with the taxpayers money. Let the taxpayers decide on their own spending and investment decisions.
I agree completely. But they have been on the decline for the last few decades, not increasing. I wonder why.
Unions/local governments/etc that finally stop entrusting their funds to banks and start investing on their own. In the US, some of the most destructive PE finance is done with money from pension funds of ordinary workers. I agree completely.
Tax reforms - cap gains special treatment should be, if for anyone, only for entrepreneurs, not investors in securities and certainly not for fund managers. I think this is mainly a US problem.
At least in Swedish history, it's the public banks who've been the maddest risk-takers, who more than anyone else blown bubbles, and then blown up themselves as well. Peak oil is not an energy crisis. It is a liquid fuel crisis.
But the result is that the public backstops the stupid and in fact destructive capital allocation decisions of private banks. Meanwhile, legit borrowers can't find capital. For example, in the US we have profitable industrial firms where management complains that finance is available for expansion in China, but not for domestic manufacturing. Why not a system where if you pass the basic credit scores and some panels of independent risk assessors, you can get a government loan? What is the value that the private banking system adds?
As for the credit union problem: In a system dominated by huge corporations that preferentially deal with each other, everyone else gets shut out. IKEA does not want to negotiate with 20 little banks when it can work with 2 giant ones and similarly, Citibank prefers to do megadeals with IKEA than with Ingmar's Eco-Friendly Furniture Craft.
To me also, public is not enough - it must be public, open, and democratically accountable. Otherwise, those who are connected soon appropriate it.
Why not a system where if you pass the basic credit scores and some panels of independent risk assessors, you can get a government loan? What is the value that the private banking system adds?
I can see a role for private banks on those projects where you want a private sector equity cushion between a potential bankruptcy and the central bank/treasury.
Of course, if you do not care about that (and given the dysfunctions exhibited by the private banking system, I could certainly be convinced of the merits of that stance), then you do not need a private banking system. And even if you do want a private banking system for edge cases, it would not have to be nearly as big as the current one, because it would only be dealing with edge cases.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
The only real function of the bank's equity buffer is that it's not tied to any single project the bank finances - so the discount window doesn't lose money if a single project goes tits-up (similar to how insurance works). But you can achieve that with a credit coop model too: Say you have twenty projects, each of which puts down 28 % of its capitalisation in margin, and they agree to be jointly liable for up to 8 percentage points of that margin. This reproduces exactly the capital structure of 5:1 leveraged firms funding from a 10:1 leveraged bank.
The mutual model of banking has advantages and disadvantages. It has ambiguous economies of scale. Which can be either a good or a bad thing, depending on the political and regulatory environment. It probably resists capture by bankers better than a demutualised institution, but is worse at resisting capture by its customers. It will probably work best in an environment where deposit-taking institutions are separated from loan-originating institutions, since deposit handling is not the core interest or competence of the people running it. But separating lending and depository functions is a worthwhile sort of thing to do anyway.
(And frankly there is no good reason not to outright nationalise the deposit handling system. Though there are also few compelling reasons to nationalise it once you've split it away from the loan-originating institutions.)
For example, in the US we have profitable industrial firms where management complains that finance is available for expansion in China, but not for domestic manufacturing. Companies can issue bonds, and then use the capital at their leisure. And the US financing system is based on bonds, not bank lending.
Why not a system where if you pass the basic credit scores and some panels of independent risk assessors, you can get a government loan? Because then you force people to take on risk they do not want. If you want to be a lender, buy shares in a bank. Or start one. The history of state-owned banks, and especially their risk management, is a sorry tale, at least in this country. When banks suffer credit losses, they fall squarely on the private owners, unless you have a corrupt political system. But then, the corruption is the problem.
What is the value that the private banking system adds? Transfering risk-averse savings into risky projects, without exposing the tax-payer to risk. And it has after all worked extremely well.
As for the credit union problem: In a system dominated by huge corporations that preferentially deal with each other, everyone else gets shut out. IKEA does not want to negotiate with 20 little banks when it can work with 2 giant ones and similarly, Citibank prefers to do megadeals with IKEA than with Ingmar's Eco-Friendly Furniture Craft. There will still be room for credit unions, even if they have a small market share in the big corporate segment. Furthermore, I suppose you could merge credit unions into megacredit unions, if they wanted to serve the needs of big corporate customers.
To me also, public is not enough - it must be public, open, and democratically accountable. Otherwise, those who are connected soon appropriate it. The Swedish experience, not only with banks, but with all state-owned companies, is that the more open, democratic etc they are, that is, the less like ordinary companies they are, the less successful they are. Rule one is that politicians must never meddle in the business of the state-owned companies. They name the boards, who name the management, who executes policy. If the state is unhappy, it changes laws or fires boards. Peak oil is not an energy crisis. It is a liquid fuel crisis.
Companies can issue bonds, and then use the capital at their leisure. And the US financing system is based on bonds, not bank lending
Bond issuing is not quite as simple as that- and banks control the gateway. Imagine trying to sell a bond without Wall Street underwriters or the approval of raters. And neither of those groups is particularly rational or well informed.
As for credit unions, that's a theory, but the actuality is that it does not happen.
I suspect that things in a small, relatively homogeneous country with a single center may not be similar to how things work in the USA.
The challenge is one of ensuring that public banks have charters that ensure against elite domination. This is daunting failing an alert, informed electorate, which we can hardly be said to have in the USA. That said, there is a great need to educate the public about the possibilities and dangers of different kinds of banks and credit systems. Given our recent history there should be some opportunity there. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
The fact that the ideology du jour dictates that this function should be carried out by private, for-profit entities, does not mean that the credit allocation part of the societal planning function should be private or for-profit. But neither it is immediately obvious that it should be public or non-profit.
This is, of course, a political function. Maybe that is the decisive argument for why it should be a public function, or at least subject to public oversight. Is a public banking regulator good enough, or do you need public management of the banks themselves? In Europe, State-owned, semi-public or regional-government-associated entities have been as badly mismanaged in recent years as private banks. (German Landesbanken, Spanish Cajas de Ahorros, come to mind).
Going from non-profit to for-profit models has been a disaster for British building societies (a few years after demutualization, all of the demutualised building societies have gone bust and being taken over by private banking conglomerates). In France, the formerly public Crédit Local became part of Dexia, and ended up blowing up. The Crédit Agricole which is mostly owned by cooperative institutions appears to be as toxic as any private bank.
In the private sector, going from partnerships to listed companies has turned the Wall St investment banks into riskier, more aggressive and more toxic organizations, and led to a number of them blowing up, too.
It would seem that the problem is the politics, not the banking per se. Any political function winds up corrupt. tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
