Why Doesn’t the Government Set Up a New Bank to Get the Economy Moving Again?

BY busadmin  May 13, 2009 at 11:45 AM EST

bank; file photo

Question: I’ve been watching the difficulties the government has had propping up the banks — the lack of control, the salaries, the fact that they’re trying to fix entities with a lot of toxicity on their balance sheets.

The following question occurred to me: Apart from political reasons, are there any good financial or economic reasons the government could not/should not set up a completely NEW bank to get lending moving, perhaps privatizing it later?

With the same money it’s now spending on existing banks, surely it could quickly ramp up such an institution? There must be plenty of qualified people available now to staff it! It could then immediately start lending to businesses, people buying cars, college students, and even other banks — and get the economy moving.

Paul Solman: The problem with your idea is the problem with nationalization in general: Do we want the government running the banking sector? Deciding on who’s credit-worthy and who isn’t? Deciding whose house to foreclose on, whose auto to repossess, whose business to shut down?

By posing these questions, I’m not suggesting I know the answer(s). But you see the problems, right? The potential for political pressure at every stage of the process? For corruption? For the bog of bureaucracy? Saturday’s NY Times featured a story about a suburban Chicago suit factory that is behind on payments to the Wells Fargo bank and thus in danger of liquidation. But because Wells Fargo has taken government bailout money, the Illinois state treasurer has threatened to remove state deposits if it doesn’t let the company stay in business.

I have no illusions about the current system, mind you: ITS corruption; ITS out-of-whack incentives; ITS bureaucracies. And I could go on. But as I’ve written here before, if America’s going to run its banking system, why not the auto industry, or health care? How about utilities? Oil? Retail? All of them could use reform, no? WE could do it more honestly, thoughtfully, competently, don’t you think? Like the philosopher-kings imagined by Plato/Socrates to run the utopian Republic, WE could run the show better.

Maybe. But then, as several readers of Plato suggested to me not long ago in a discussion of The Republic, the book is either unrealistically pie-in-the-sky or, more likely (they argued), IRONIC: an attempt to show just how futile planned economies are.

Markets, for all their excesses and vulnerabilities, have certain undeniable virtues. They tend to get people to work hard. They tend to spur innovation. Too MANY innovations in the case of financial markets this time around, critics would argue: innovations whose failures have led to the Great Suppression — of credit, credibility, confidence.

But do we really want a world with no securitization, for example? A world in which the risks of home mortgage borrowing or student loans can’t be spread across investors worldwide, as securitization makes possible? A world without ATMs or money market accounts, unknown as recently as the 1970s? A world without credit cards, perhaps?

Theoretically, one could design a government-run system with market-like incentives. Morally, one might want to. But practically?