In the debt thread I proposed that the banks should be nationalised. In discussion off-board it seemed that there is some confusion about what nationalisation means, and I confess that in the banking sector I have limited information about the details. But I thought it was something which warranted another thread to discuss the concept of nationalisation in general, and nationalisation of the banks in particular. So here goes.
A nationalised industry or organisation is one which is wholly owned by the state. As an idea that tends to be met with a fit of the vapours, and the opposition to it is based on a political ideology posing as pragmatism. Since the advent of neoliberal hegemony the notion that government is uniquely incompetent to run anything has been very widely accepted, and it seems that it has been seldom challenged in the last 3 decades. Since nationalised industries were a large feature of the british economy from 1945 until about 1980 it is curious that it is no longer seriously considered: and that is the measure of the success of the neoliberal agenda.
It is, of course, possible that this is because nationalisation was tried, and demonstrated to fail comprehensively. That is an unspoken premise of any conversation which raises the issue nowadays, and I imagine that many have never even thought to question it. But it is not so, IMO. I have often been struck by the fact that the actual structure of many bodies is assumed to be private because any alternative does not occur to people. As an example, I have found more than once that people who are not in the UK recognise that the BBC produces good television and radio: and are completely unaware that it is state owned and run. Since it is good, the assumption is that it is private: that is quite a remarkable colonisation of the mind, I think. It is based on magic thinking, so far as I can tell.
From my point of view there is no reason to suppose that any particular structure of ownership is better than another. It rather depends on what you want to achieve. In post war Britain the Attlee government undertook a large scale nationalisation, beginning with the bank of england in 1946. Long distance communcations such as the telephones were nationalised next. Coal and the railways followed shortly afterwards and then iron and steel in 1951.
From the outset the split in thinking was evident, and it accounts for the relatively late nationalisaton of the iron and steel industries. There was little opposition to nationalising coal or the railways: they were not profitable, and in fact the owners did rather well out of the move because they were paid far more then the industries were worth. But Iron and Steel were profitable, and so there was significant resistance to taking them under state control. The argument was basically of the form "if it ain't broke, don't fix it". Against that thinking was a different set of values altogether: for those in favour of state control the point was not to give the state a role in providing services ony when the private sector could not make profit: rather, the idea was that things which were essential to the welfare of the state should be controlled by that state: the question of profitablity was irrelevant. That divergence of view has persisted to this day: but the basis of it has been lost because it is no longer fashionable to address principles. We now discuss things in terms of "what works" and do not ask "what works for whom?" or "what do you mean by "works"?". It is assumed those are not questions at all, so far as I can tell. Yet they are absolutely central, and the answers are not obvious.
The first problem is to decide what is essential to the functioning of the state. On one analysis one could answer "everything", and that is the communist response. Central planning of the whole society is a logical outcome of that analysis, and the communist state is internally consistent in that way.
If one is a libertartian one might answer "nothing": that is, it is assumed that anything which is of value to people will exist, because people will pay for it. Anything which does not exist on that basis is not essential, by definition. That, too, is consistent, and it has the advantage that nobody has to make a messy decision which might turn out to be wrong. The question is answered objectively, rather, and there is neither blame nor failure no matter what the outcome. It is moot whether that ends in the existence of a state at all: but that is by the by.
I think that most people fall somewhere between those extremes. Most would accept that there are at least some things which are necessary: a system of money, for example; or an army; or a welfare safety net. For that reason most states have some version of the "mixed economy", whether that is a term they use or not. On this conception, no matter where you draw your lines, the collective decides the framework within which people act, and puts limits on that action so that no group can damage the whole in pursuing its own interest.
If that much can be agreed there remains the question of what limits there should be, and in which arenas. This is the sticky bit, because it depends on what your goals are: and that, in turn, depends on your values. Ultimately it depends on the weight you give to individual freedom as against social responsibility. These things are genuinely opposed, and most people value both: but in different degree.
If you imagine a group of school children, it is very possible to see this in action. The biggest, baddest kid will soon have all the pocket money if everyone is free to do what they like. Most folk do not wish to tolerate that as an outcome, and so we do two things: we impose a limit in the form of school rules backed by sanctions: and we teach children not to steal or bully as a matter of socialisation. To the extent that we do that, we accept that the group has value, and every member in it has some rights. We accept that unfettered individual freedom has consequences so adverse for the whole group that it is legitimate to place limits on that for the greater good: and in doing so we fundamentally accept the idea of "society" (the group) as something worthy of defence. The rule of law (and that includes informal "law" such as notions of acceptable behaviour) is the roof we all shelter under; and we recognise that. Even the biggest, baddest kid (if he is not utterly stupid) will come to accept it: because he will not always be the biggest and baddest, and so he has at least a potential interest in the rule of law, too.
In the small group it is relatively easy to see some limits on individual freedom which are both desirable and necessary; the 10 commandments is as good an illustration as any. So long as you are only trying to regulate the actions of individuals vis a vis a notional group, there is not much of a problem. For the classical economist it is axiomatic that each individual will act in his own economic interest and will do so rationally and with good information so that he can decide where that interest lies. On that theory allowing maximum freedom within the 10 commandments will produce the best outcome. But this depends on what you decide to allow to count when making that calculation. For example: in the past many people were dependent on coal to heat the house. Most houses had chimneys. All chimneys needed to be swept. It is cheaper to make a small chimney, and it is also more efficient in terms of fuel consumption. For the rational economic man, it is sensible to build small chimneys and to send poor children up them to clean them, than it is to build bigger ones and do it yourself. It is best of all if there is a group of such children. And so that is what happened. If you assume that both the chimney sweeps and the houseowners are equally free to make rational decisions the kids go up the chimneys and there is no problem at all. But the problem is that they are not equally free: if the alternative is freedom to starve for the one, and freedom to have a smoky house for the other there is not really much doubt how things will play out. The "opportunity costs" are very different, in short. But although that is a very important concept im some parts of the economic forest, it is not allowed to count in this situation. Not if you mean "count" as in take a collective decison to level the field. And yet that is what we did. We decided collectively to increase the cost for the householder, by putting him in jail for sending kids up his chimney. We also decided to reduce the cost for the chimney sweep by diverting resouces so starvation was not the only other choice he had. To me that illustrates the fact that these costs and benefits are not fixed: they are a consequence of what we decide, as a group, to do.
Everything to do with money is like that: there are no objective costs or benefits: they are constructed by the group, and dependent on how we decided to allocate resources. And we do that through passing laws: which are the business of politics, not economics. And that is why TINA is a lie.
There are any number of ways to characterise our collective decision to stop the practice of sending kids up chimneys: but it was essentially a moral decision. To me it seems obvious that it was made up of a recognition that this was bad for the chimney sweeps as individuals, and as a group: and at bottom it was no longer acceptable for one group in society to pay a very high price for the convenience of the majority. It is just such thinking which underpins one plank of the case for nationalisation: in the case of the mines the conditions the miners worked in were appalling: and they improved when the industry was nationalised, because the state made it so. Wasn't perfect by any means: but removing the profit motive did allow cuts in hours and provision of showers and that kind of thing. And that is one problem with the much vaunted profit motive: it inexorably leads to poor conditons for the workers. One does not need to nationalise to avoid that, of course. You can do it by legislation and good enforcement. Employers will squeal that they can't afford it. Usually they will be lying: but in the case of the mines they were not. They were already unprofitable. The only way that one could improve conditions and still produce coal was by nationalisation, and the recognition that, for a time at least, this would be subsidised through taxation.
That was not the only question though: there was another political calculation. Coal was almost the only domestic source of energy in the uk. The war had just ended and the problems of supply were very obvious for an island which is not self sufficient in food, or much else. The dangers of dependence on other nations for essential materials were very stark at that time, and it was accepted that coal was one of the things which was essential for the survival of the state. Private ownership had not invested in the mines, which were backward in terms of equipment and technology, and was not likely to. If the market was left to its own devices it was possible that there would eventually be no more coal production. And from an economic point of view that is probably fine: but from every other point of view it was not fine at all. And so in this example the needs and interests of the state trumped the economic case, and that was a political decision on the basis of the centrality of energy to national security and prosperity. (As an aside, this is another illustration of what is allowed to count: the neocons accepted their own logic and closed the mines in the uk as uneconomic. That was possible in part because oil and gas became available from the north sea. But availability of cheap middle eastern oil was a factor as well. It would have been possible to continue in pursuit of self sufficiency, but it was very much cheaper to import oil and that is what we did: in considering the costs and benefits of that decision you have to factor in the oil crisis of the 1970's; and also the costs of the wars for
oil democracy we have been fighting ever since.)
Which brings me to the banks. No matter what a state produces, or consumes, or trades, the transactions are done with money, including credit. Whoever controls the money supply and transfer is the power in the land. It does not matter what the formal strucure is: that is the reality. It follows that any state which allows any other body to command those things has ceded its sovereignty.
If you believe that all groups within a society are loyal to the state, and working for the common good, then that might not matter: but because the common good is not obvious, that is a rather dangerous assumption to make. It is the central assumpton of the neoliberals because "what is good for general motors is good for america" is at the heart of their narrow little world. Since they are constitutionally incapable of detecting other values, they are blind to the problem.
In a democracy, however flawed, the voice of each separate and opposing interest is heard, and has the power to protect itself. That is what a democracy is for, and it is the ultimate safeguard for everyone, as outlined in the "Alternative View" thread. But that only works if the democratically elected body is itself sovereign. Without control of the money it isn't. It then does not matter what the group can work out as a compromise aspiration: because the government cannot deliver.
In the first place, as I have previously noted, the control of the supply of money was passed to banks and financial institutions through deregulation. In the traditional bank, the money they had came from deposits from savers. They stored it, and they used some of it to make loans. So when you took a loan, they transferred some of that real money to you. The transaction was neutral: Mr W deposited £10,000 in cash:the bank stored £5000 with the central bank; You borrowed £5,000 from the bank: and they gave you the balance of Mr W's money. The bank charged you X% for the facility: and paid Mr W X%-Y% as interest. The difference was the bank's profit.
The bank had to keep a reserve (in this case 50%) so that if Mr W wanted his money while you were using it they could still pay it back to him. Of course they only had £5000, but Mr W is not alone, and there are actuaries who work out the percent required to meet normal demand from all the Mr W's. And that was guaranteed by the central bank just in case too many Mr W's wanted their money at the same time: but if there was trust that didn't really happen. If it did, the central bank was only in the hole for half the amount: and if the bank survived they would pay it back eventually. The central bank controlled how big their liability could be because they made the money: literally. What Mr W deposited was limited by the physical money in circulation: what the bank could lend you was too. Only the central bank could make any more: and if there was a run on the bank they would do it to pay Mr W, if they did not have enough in reserve to pay him.
Let us say the central bank started with £50,000 in reserves which is money it has printed: that is the total supply of money in this wee economy. At some point it gave Mr W £10,000 of that. So the total money supply was: Central Bank £40,000 + Mr W £10,000 = £50,000.
Mr W deposits his £10,000. £5000 goes to the central bank and Bank A lends you the other £5000. Total is still £50,000: CB has £45000 + you have £5000
If you default then when Mr W has to be repaid the bank can't give him any for it hasn't got any money now. But the total amount of money in this wee economy is now £35,000 held by the central bank, after paying Mr W, +£5000 which was lent to you and is out there somewhere + £10000 belonging to Mr W.
There is still £50,000 in total. The loss has been transferred to the central bank, but the total amount of money is the same.
That is no longer what happens. Now if you wish to raise a loan from the bank they do not give you Mr W's money. What they do instead is enter your loan as a debt on their books: and give you the credit as before: but instead of the credit coming from money they have on deposit, it comes notionally from an "asset" they hold on their books. As an example: Bank A lent £10,000 to Mr L to buy a house. On its books is a debt of £10,000 owed by Mr L, and that debt is secured on the house. Mr L can't pay. The house is not worth £10,000. But on paper that debt is just the same as Mr W's cash deposit. The bank does not need to give the central bank £5000, because this is a mortgage and the house is the security. So the bank can lend you £10,000. It doubles its profit. But there isn't any money. It can also lend Mr W's money and no longer needs to give half of it to the central bank. But let us suppose it is a prudent bank and it keeps half as a capital reserve anyway
The central bank has a total of £50,000. It gave £10000 to the person who sold Mr L his house., and £10,000 to Mr W as before. So the money supply at this point was CB £30,000 + vendor £10,000 + Mr W £10,000= £50,000 as before.
Bank A then lends £10,000 to you, which is against the "asset" of Mr L's house. And £5000 to Mrs P, which is half of Mr W's money.
Now the money supply is CB £30,000 + Vendor £10,000+ Mr W £5000 (in bank A) + your loan £10,000 + Mrs P's loan £5000= £60,000
The extra £10,000 comes from the "asset" which is not worth anything, but which turned into real money when it was lent out.
An increase in the money supply is a bad thing, according to economists: it leads to inflation. It is for this reason that there are treaty restrictions within the eurozone against governments printing money to fund deficits. Whether that is a sensible thing or not, the assumption was that only governments would do this. There are no rules about private companies doing it: and so control of the money supply has passed to them. If a government happens to believe that controlling the amount of money is the route to prosperity (as many do, that being the monetarist wisdom) it cannot implement its policy because it is not in charge. It doesn't matter what it promises in an election or sees as desirable: it does not matter what the people vote for wrt to monetary policy. The private companies determine how much money is in circulation, and there is nothing the governments can do about it.
That is part of the story.
The other important part relates to bank losses.
In the example given here the bank losses are separate from the money supply: although the money is still out there in some sense it is not "in here" from the bank's point of view. So let us look again at these two scenarios.
A bank has to have some capital so let us suppose it has £20,000 in the form of shares. Half are owned by private investors and half by a pension fund. Let us suppose they are all £1 ordinary shares and so have no guaranteed dividend.
In the first case Bank A uses real cash issued by the central bank to conduct its business: it is constrained in what it can do by the requirement to deposit reserves of 50% with the central bank. It uses money received from depositors to make loans: and its profit comes from the difference between interest paid and interest charged.
It has one depositor: Mr W. He has deposited £10,000. Half is lodged with the central bank:the other half is available to lend. In this case it has one borrower, you. You borrow £5000 and because this loan is not secured the bank charges you 10% interest a year. Payment is to be made in 12 installments of £458.33. You pay 6 of them and then you stop paying. The bank has income of £2758. It has no other source of money. It cannot repay Mr W and he wants his dosh.
This is a private company. What should happen is the bank deals with this situation: it can pay Mr W £7758 through the deposit it has made with the central bank, and the money you paid back. It can borrow to cover the shortfall. But the shortfall is £2242. This bank was only going to make £500 profit on its transactions in a year, if all went well. So if it is to borrow that much it is going to have to pay high interest on the loan it takes: and charge higher interest to borrowers in future. It has capital of £20,000 and so it can pay Mr W out of that instead, if it wants: but that is not really its own money: it belongs to the shareholders.
Assuming it does that its balance sheet reflects the loss: it had £30,000 of assets (your loan +the reserve + capital) and £10,000 of liabilities. Net £20,000. Now it has £17,758 net ( (capital + income +reserve) - repayment to Mr W ) It has lost about 12% of its value.
If it opts to raise a loan instead it needs to take more than it owes to give it extra working capital. So let us say it raises £5000 and has to pay 10% for it. So now it has net assets pf £17,258 (because of the interest). Still around 12% of its value.
What that means is the shareholders have lost 12% of their investment. Since that is real money to them, they are not going to be happy: so let us take the simple case and assume the share value falls 12%, in line with the performance. This means that someone can buy this company for 88% of what it seemed to be worth yesterday.
In the second case the situation is similar with the addition of the unsecured security which arises from deregulation: This bank does not use real cash issued by the central bank: it generates money from nowhere (Richard Murphy reports that only 3% of cash in circulation was actual money in 2007) as shown, and it is not required to make reserve deposits. It can lend as it wishes, and there are few constraints on its activities, so that investment and speculation go right along with the traditional business.
Again it has one depositor Mr W, who has placed £10,000 in the bank. For simplicity let us say just one borrower, you, It has one "asset" which is not actually worth anything in the real world (Mr L's house loan which he cannot pay). You borrow £15000 and because it is unsecured the bank again charges 10% interest. This is to be repaid in 12 installments of £1375: and again you make 6 payments and you default.
The original balance sheet showed assets of £10,000 from Mr L's house: £15,000 from your loan: £20,000 capital: £5000 retained cash from Mr W: Total assets £50,000. Liabilities are £10,000 owed to Mr W: Net is £40,000
After this happens assets are £20,000 capital and £8250 income you paid. Plus the £5000 retained cash: total assets £33,250: liabilities are £10.000 to Mr W as before: Net is £23,250
It has lost about 40% of its value. It can pay Mr W as well: but again the shareholders are not going to be happy.
The profits from such speculation are higher: and the losses are higher as well, when things go wrong. Losses are more likley in the second situation because the banks do not properly assess the risk and they lend more money because they magic it up out of nowhere. They also take the profit from interest on the use of this magic money: profit which should properly go to the central bank and therefore to the taxpayer: new money earns interest when it is used, and it earns it for whoever makes it appear. By rights the banks should borrow that money from the central bank and pay interest on it like anyone else. Then they charge more interest for lending it on again: they still get a profit, but not so much. Interest paid to the central bank is the base rate: all subsequent loans cost base rate+. But if the bank creates the money all the interest goes to the bank and there is none for the taxpayer. I am sure it is a coincidence that the production of money has been privatised in this way.
The losers out of this are the investors: who have seen the value of the company they own diminish. It is this aspect that makes the banks too big to fail: because the shareholders are pension funds and other agencies important to every one of us. If the end point of the process outlined above is a bank with too little capital to continue trading those investors lose some or all of their money. What should happen is they go bust: they are private businesses and they have taken risks and they have lost their money: but it is not their money, sadly: it is yours and mine. Not all of it: some of it belongs to speculators and private people who can stand a loss: but a great deal of it is insurance and pensions etc. And aside from those investors a lot of the money is your savings and your wages and your pension; and mine. Because the other losers are people with money in the bank.
In the past the speculators were not in play and the banks could not get into this mess for they were regulated after 1929, when this happened the last time. That regulation worked and there is a case for reinstating it: there is also a case for outright nationalisation . At the very least the banks should not be permitted to act as speculative investors and at the same time as deposit takers (traditional banks) We have known this and forgotten it but that is frankly indefensible. Ring fencing is not enough. They need to be completely separate institutions.
The reasons for nationalisation are many: The banks have shown they are utterly incapable of assessing risk: which is their job. At its most obvious, ask yourself this: if someone invited you to buy something for resale at £100 and you knew it had been selling for 5p last year: would you be confident you would make a profit when you came to sell it on? Would you ask some questions aimed at finding out why it was so dear this year? Whether the price was likely to fall back? If the item was exactly the same as it was last year: and there was no hyperinflation such that buyers' income had risen comparably, would you imagine it was a good buy? I wouldn't. I would not buy it. But the banks would: and did.
Similarly, if someone suggested you buy a pig in a poke would you? Derivatives were a pig in poke: nobody knew what was inside: but the banks bought them.
I know 10 year olds who would be better at this kind of thing than bankers: if we believe that they were honestly trying to run good businesses they are beyond stupid: I don't think they are: I think they did not care for anything except their own money. And that is not skill it is fraud. In those circumstances regulation is not the answer: jail is. But they cannot be left in place with tighter oversight: whether they really are that stupid or really are that criminal makes no matter really.
A second reason occurred to me when reading around this subject: it relates to the guarantee for depositors if the bank fails in this way
Mr W's money is guaranteed by the central bank and so he will get his money back. The question is how. And this brings up the second difficulty. There is no way I know of to transfer money from the central bank to Mr W except through a bank. Perhaps it can be done through the post office: or a different bank. But one of the things which has happened since deregulation is that a great deal of business has been forcibly transferred to the banks: and alternative means of making financial transfers are increasingly rare. To illustrate: a great many workers used to get paid in cash. That is pretty much unheard of now and everybody HAS to have a bank account. Benefits claimants used to get a giro as a matter of course: but that is now only allowed in very limited circumstances and you really HAVE to have a bank account. Pensions used to be paid at the post office with a pension book: but again this is no longer an option and HAVE to have a bank account. There used to be a publicly owned bank run through the post office: but it was privatised.
All of that was done for ostensibly good reasons: security, efficiency etc. And there is no doubt that most folk are quite happy with it despite some problems which are still in play and have not been fixed (eg: if you are a benefit claimant on very limited means you can find that your last fiver is inaccessible because machines won't pay out less than £10: but it is not insurmountable so long as you know that). But what it does mean is that the banks have a lot of deposit money they would not otherwise have: most of it is probably in and out the same month: but in terms of ratios of lending to deposits I imagine it makes a difference. Assuming that some wages are paid at different times ( I have been paid weekly; fortnightly, 4 weekly, and calendar monthly in different jobs) some large amount of money will be in the bank all the time: and that is available for use on a ratio basis). The banks sometimes bleat about running free accounts: but it seeems to me they win out of this, or they might do.
As with ordinary people so with government and other bigger institutions. I had been wondering why the bail outs to Greece were going through the banks, and why bailouts to the banks were given to them directly with no apparent way of making them do what the money is intended to do: lend to businesses. And I got to wondering: if you are the government can you actually lend to businesses or even countries
without going through a bank? I actually doubt there is a mechanism. If that is correct it is not trivial. For that reason alone we need at least one publicly owned bank with a full range of services, IMO. Otherwise the banks as a whole have a captive market, and there are not enough of them to make me comfortable with the range of choice. Today on the radio concern was expressed about lack of competition in the energy market because yet another company has been found guilty of malpractice and fined 2 million pounds: and there are 6 main companies supplying domestic fuel: there are not many more banks that I am aware of. If it is not enough for energy how is it acceptable for finance?
But one publicly owned bank is not enough: it will always be compared on terms of the neoliberals choosing: and that brings us back to chimney sweeps and miners. A properly run bank cannot take the risks these clowns have taken: therefore it cannot and should not make the big profits which attend the start of a bubble: and without control of the money supply there will be bubbles again. The unfavourable comparisons will be made: and the daft conclusions will again be drawn. And we will get on the merry-go-round again as we have this time.
Banks are essential. They have the capacity to destroy a society as surely as an invading foreign power can. They must be state controlled and that means state owned: for we have an "enemy within" to borrow a phrase Margaret Thatcher used: but it was not the unions: it was her and her ilk. They will always be there.
We have to spend the money to make the banks work again: that is to lend and get money circulating. We have to pay the depositors and the institutions like pension funds. There is no way out of that. But to give the money to the incompetent and/ or the criminal is ridiculous. We need to ensure that the thing is properly run if we are going to spend the money: and with £5 billion profit in 9 months from one bank announced today, that profit would surely help: as would the millions currently diverted to remuneration packages. Even it it is a drop in the ocean, and I am not convinced it is, every little helps
Edited by FionaK - 1/11/2011, 13:46
