Why Rescue Banks?

What is it that a bank really does?  In college, many decades ago, I was taught that banks served to bundle many small investments to make them available for investors to create productive businesses.  More recently, the idea became popular that banks specialized in accumulating information that made them ideally suited to determine which investment projects would be viable and which would lack merit.  Of course, with the demise of Glass-Steagall, banks did accumulate massive amounts of information — especially when the same company ran a person’s bank, stockbroker, insurance company, and credit card.  But that kind of information is something entirely different.

By the time this new idea of banks as information specialists became widely accepted, the business of lending to large corporations was shrinking.  Large corporations were able to finance themselves by borrowing directly in the commercial paper market.  To compensate for this lost business, banks began to see their future in collecting — organizing mergers and acquisitions, bundling financial investments in novel ways, and, on the retail side, late fees from unwary customers.  And yes, bundling subprime loans. Is any public purpose served by slicing and dicing financial paper?

We all know that until recently they were very successful, but the question is whether their success reflected any public purpose.  We now know that the financial system was not particularly efficient in gathering information.  If it was, TARP would not exist.

Why couldn’t banks be more like a public utility, as they were supposed to be in the age of Glass-Steagall?  Just as a public utility sends water or electricity to where it is needed, public banks could run checking accounts for the public, paying bills and accepting deposits.

6 comments so far

  1. Ted Zuur on

    Why couldn’t banks be more like a public utility, as they were supposed to be in the age of Glass-Steagall?

    Two points.

    1) Obviously banks could be public utilities if they were public property, or even if they were regulated monopolies. Even if the bailout money were used to just buy the shares of the bankrupt banks (instead of bailing them out), this goal could be accomplished.

    2) Public utilities are no longer public utilities, not since the national grid was formed, and FERC took over real “regulation” from state PUCs.

    A highly regulated form of very privatized capitalism, like the New Deal variant of capitalism, however probably can not save capitalism’s bacon this time around. But it may be tried.

  2. mperelman on

    Your first point makes sense & does not contradict what I was writing.

    FERC has increased its powers, but has not entirely displaced state regulation. In California the public utilities deliver gas as well as electricity.

  3. Ajit on

    One unrelated and unsolicited advice. Why don’t you turn off this snapshot feature in your blog. Whenever I point my mouse on some link on your website it opens a snapshot. It is so clunky and totally unnecessary, Atleast in my opinion.

    Louis Proyect too had that feature on his blog. I told him the same thing. And he has since then removed it.

    http://louisproyect.wordpress.com/2007/12/27/escaped-tigers/

    See First Comment.

  4. mark hansen on

    use your favorite search engine to find the north dakota state bank.
    the only state governemnt owned bank in the country.
    somewhat related is the north dakota state mill and elevator.
    they both seem to be doing well.

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