Two important shifts in perceptions of banks and bankers seem to have happened in the last two weeks. The first is that the idea of nationalising the banks – rather than just taking increasingly large stakes – has crossed into the mainstream. The second is that there seems to be visible anger about the greed of the bankers. But it is still not clear how these attitudinal shifts will translate into political change.
The initial running – and this is perhaps surprising – seems to have come from columnists on the Financial Times.
Willem Buiter, a former menber of the Bank of England Monetary Policy Committee, and also an FT columnist, made the argument in a column headed ‘Time to take the banks into full public ownership” on Friday 16th after the Irish government had nationalised the Anglo Irish Bank. Buiter’s argument is partly a technical one: that the current disposition of partial short-term state ownership actually encourages banks to hoard money:
If the state’s financial assistance is priced punitively or has other painful conditionality attached to it, existing shareholders and management will do everything to avoid making use of these government facilities. If a bank has no option but to take the government’s money, it will try to repay it as soon as possible – to get the government out of its hair. Such a bank will therefore be reluctant to take any risk, including the risk of lending to the non-financial private sector.
The US has tried to avoid this problem so far by throwing cheap money at the banks with few conditions attached. But this rewards bad choices and has a high level of moral hazard attached to it. For this reason Buiter concludes that there is a “better alternative”:
to inject additional capital into the banks by taking all the banks into full public ownership. With the state as sole owner, the existing top executives and the existing board members can be fired without any golden handshakes. That takes care of one important form of moral hazard. Although publicly owned, the banks would be mandated to operate on ordinary commercial principles.
Buiter, though regards this as a temporary solution – though medium-term temporary rather than short-term. And on Monday Philip Stephens, also in the Financial Times, in the wake of the latest UK bail-out:
Now it has gone this far I cannot understand why the government did not take the next logical step of assuming majority stakes in all those institutions now dependent on public money. … The banking system has already been in effect nationalised … Whitehall officials tell me there are all sorts of technical reasons why outright nationalisation is not the right answer – while adding that it may yet happen.
Buiter even puts a price tag on bank nationalisation: “It would be cheap. It should not cost more than £50bn for the state to buy the rest of the UK high street banks. It could wait a while and get them even cheaper – possibly for nothing. But time is more precious than money in this case.”
In fact, as Seamas Milne noted on Thursday in the Guardian, apart from Willem Buiter, there was a growing list of less and more likely people advocating bank nationalisation, including Jon Moulton, boss of the private equity firm Alchemy, and Jim O’Neill, chief economist of Goldman Sachs, as well as the Liberal Democrats and increasing numbers of Labour MPs and trade unionists. Where Milne differs from the FT writers is that he’s not sure why the move should be temporary:
as the scale of devastation wreaked by the banks on the global economy becomes clearer, The case for a socially owned finance sector grows stronger by the day. If, after all, the banking system is so vital to a modern economy that it cannot be allowed to go bust – and the dangers of socialised risk and privatised profit are so evidently great – then it is too important to be left in the hands of private companies dedicated to maximising profits for their shareholders.
It’s similar to the argument made for the nationalisation of rail and coal in the post-war years. One of the problems with talking about nationalisation is that the rationale for it has been lost in ideology (Thatcher’s “rolling back the frontiers of the state”) and, for new Labour, some totemism.
Close examination of the data shows that throughout the Fifties and Sixties the performance of the nationalised industries in terms of productivity and growth matched or exceeded their private-sector counterparts. It was in the inflationary Seventies, when the Heath, Wilson and Callaghan governments compelled the nationalised industries to hold down their prices, and thus their profits, as core parts of ill-considered prices and incomes policies, that things began to go seriously wrong.
And there is some interesting ancillary evidence for this. Three of Britain’s most innovative business thinkers – Stafford Beer, Geoffrey Vickers, and E.F. Schumacher – all spent much of their careers working in nationalised businesses.
The politics of all of this are still unclear. There are clear signs of increasing anger about bankers, on both sides of the Atlantic – I had an email from a friend this week arguing for a “show trial” for Fred Goodwin, the disgraced but wealthy former chief executive of Royal Bank of Scotland, while journalist Simon Hattenstone spent some of the week trying unsuccessfully to get Goodwin to say sorry. Philip Stephens wrote of “the mix of insouciance and venality that often describes the banks’ response to the crisis”. In the US Paul Krugman blogged that his wife had suggested that the time had come to “try sacrificing a few bankers — central bankers, investment bankers, whatever — to appease the financial gods.”
Anger needs to be articulated if it is translate into change, and it’s not clear how this will happen. Polly Toynbee wrote this weekend, “If Labour doesn’t understand the brewing indignation, some movement nastier and more populist might, if the darker predictions for coming years prove true.”
For his part, Philip Stephens can’t see what’s holding Labour back:
For the moment, though, I cannot think of a more popular policy than shooting the bankers and nationalising the banks. It might even win Mr Brown an election. Come to think of it, it could also be the way to get us out of this mess.