For the past year, we have watched financial institutions regularly being nationalised, part nationalised or effectively nationalised in all but name.
We happily accept that this is right, as banks are ‘too big to fail’.
But is it right? Is nationalisation a good or a bad thing?
Most folks who grew up under Margaret Thatcher, Ronald Reagan and the Cold War years, think that nationalisation is a swear word. They were ingrained in privatisation bids and offers, the de-nationalisation of everything that was nationalised, and the belief that free markets reign supreme. Milton Friedman was the one and only economics voice worth listening to, and businesses should be allowed to fail if they cannot compete.
AT&T was broken up, British Airways had to fly free and all public institutions were scrutinised in exact detail to see if they were really in the public interest. Public-Private Partnerships flourished, and lots of folks made a lot of money from privatisations.
Two decades later, we all wonder whether this was right.
On reflection, maybe not.
We now look at 1929 and think that John Maynard Keynes was the right one, and that we should allow the word nationalisation back into our lingo.
So, in the context of financial services, is nationalisation a good or a bad thing?
In the past week alone, we have seen the nationalisation of Anglo-Irish Bank and the nationalisation in all but name of the Royal Bank of Scotland. Germany’s effectively nationalised HypoReal Estate, whilst the USA has all but nationalised Citibank, Fannie Mae, Freddie Mac, AIG and the rest.
Nationalisation isn’t so bad after all … but I can see a few reasons for and against such tactics so let’s debate it for a minute.
Unusually, let me start with the case against nationalisation.
First, nationalised institutions are lazy and rubbish. They have no customer interest at heart, are a complete monopoly with no competition, and politicians and civil servants have no idea how to run a business. The result is that you just get big, fat, incompetent, useless operations, managed abysmally. They are happy to run like this because they lift their money directly from taxpayers’ pockets and have no worries about funding therefore.
Second, nationalised institutions do nothing to move things forward. They just keep their engines running with incremental spending. The result is that there is zero innovation or creative thinking. Nationalised institutions aren’t there to innovate, they’re just there to operate.
Third, if nationalisation is such a good thing, then why did we tell China to stop it?
In the case of China, the state-owned banks were accused for years of serving the State’s interests and not the people’s. China’s citizens were encouraged to save and not borrow, they pooled all their monies into the State’s banks who treated them like victims rather than customers, and the State moved all that money into State projects, such as railroads, farming and manufacturing.
Then, in 2001, China was told to open up the banks to competition and free market forces if they wanted to join the World Trade Agreement and start trading freely with the world.
Result: China has been opening up their banking market and allowing foreigners to compete and invest. They have move from nationalised banks to privatise banks because the world’s market dictate that this is the way it has to be.
It’s obvious: banks owned by governments are a bad thing.
So that’s the argument against nationalising banks.
Let’s look at the arguments for nationalisation.
The banks are "buggered", business is being strangled by a lack of funding, the economy is trashed, and politicians are about to be voted out of office due to the wholesale funding markets becoming drier than a desert in the summer.
Let’s nationalise the banks.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...