Why don't we turn the banks into regulated public utilities?
Yglesias is one of many sage commentators, free marketers and small-government types alike, hailing the newly published book The Bankers’ New Clothes as perhaps the best-ever blueprint for substantive banking reform. Its authors are Anat Admati of Stanford Business School and Martin Hellwig of the Max Planck Institute. ...
In a nutshell, Admati and Hellwig propose that banks fund 20 to 30 per cent of their activities from raising money with sales of stock, or equity. Equity needn’t be repaid. And it doesn’t require the payout of dividends, either, if banks choose from time to time to finance themselves internally by reducing or eliminating dividends. This reform would not only liberate banks as prisoners of debt obligations, it would bulk up retained earnings as a cost-free source of capital and provide a safety cushion when the banking world periodically turns upside-down. ...
No government will come to the rescue of McDonald’s Corp., and its management acts accordingly. Banks, by contrast, enjoy an implicit guarantee that they will not go belly up and renege on their debts because society cannot afford to let them do so. Governments have spent trillions of dollars injecting emergency cash into troubled banks, and have absorbed the bad loans of crippled banks forcibly merged into sounder ones. Remarkably, some megabanks are still racking up multibillion-dollar losses on errant derivatives and other high-risk investments.
This absence of harsh consequences for cupidity in banking encourages risk taking that borders on lunacy. Every decade or so there’s a banking crisis. Feckless lenders threw too much money at developing-world borrowers in the 1970s, then at overheated petroleum and commercial real estate markets in the 1980s, triggering a savings-and-loan (S&L) crisis that cost government billions of dollars to clean up. They fuelled the boom-bust cycle in dot-coms and telecom in the 1990s and most recently inflated the housing bubbles in North America and Europe in the 2000s.
In stubbornly refusing to accept, much less embrace, common-sense industry reforms....
I love the phrase "common sense reforms." Everybody in the Beltway loves it too! Because it never amounts to anything. Notice how, say, reinstating Glass-Steagall isn't even "on the table" as a "common sense reform." Notice also the complete failure to mention accounting control fraud as a cause of the S&L crisis!
And continuing the quote:
... bankers seem determined to continue running what are effectively public utilities in the chief interest of lavishly paid executives and traders, largely oblivious to the interests of the larger society. As such, they are making the case that sound practices will have to be imposed on them.
So if the banks are public utilities, why not make them public utilities? Why crap around with manipulating their balance sheets at all? Why walk up to the real solution, then wuss out?*
NOTE * Exactly as Stephen Brill walked right up to single payer in his essay on health care in Time, and then, he too, wussed out.
NOTE Obviously, public banking should be done from the US Post Office, which has a built-in and extremely convenient bricks and mortar system already in place, with facilities to accept and disburse money.