Nationalise the Banks?

Banks are very profitable. The reason for this is that their existence is more or less guaranteed by the state. This allows them to take greater risks than they would otherwise prudently dare - although it's not a real risk at all,of course - given that they know they'll be propped up! (In the business this is called moral hazard!)

Sometimes that risk-taking leads them (or, rather, leads their depositors, employees and small shareholders) into trouble (eg Northern Rock) but most of the time, knowing they have an effective safety-net, they make very good money.

The taxpayer is funding this. A very excellent article by Martin Wolfe in the Financial Times (here) explains all this much better than I could. He says that the banks are utilities - performing a range of valuable services. They are, and do, but at a high (but usually hidden) social cost. Governments dare not let banks fail - and therefore can find many £Billions at the drop of a hat when one of them gets into trouble, whilst not being able to find a penny when non-banking savings schemes (for people on lower incomes) go belly-up. (These latter people are the REAL risk-takers!).

The standard approach is to say that the Government is in a double-bind. On the basis of a market economy, they can either surround the banks with rules and regulations and all the related banking industry state institutions (as now), or they can be true to market economy philosophy and let banks fail.

Martin Wolfe has this to suggest, "What seems increasingly clear is that the combination of generous government guarantees with rampant profit-making in inadequately capitalised institutions is an accident waiting to happen – again and again and again. Either the banking industry should be treated as a utility, with regulated returns, or it should be viewed as a profit-seeking industry that operates in accordance with the laws of the market, including, if necessary, mass bankruptcies. Since we cannot accept the latter, I suspect we will be forced to move towards the former. Little can be done now. But when the recovery begins, we must impose higher capital requirements."

In effect, do nothing but "monitor more closely". But he really should refer to the paragraph a little earlier in his article, when he said banks-

"are staffed by single-minded and talented people. They go round regulations, just as water flows round an obstruction."