Popular Fiction: Banks as Private Enterprises

A thoughtful and somewhat heretical article from Naked CapitalismWhy Do We Keep Indulging the Fiction That Banks Are Private Enterprises?

The gist of the article is-

The financial industry has unlimited access to the public money and is, by far, the most subsidised in the world (which is itself a gross understatement). However they act to increase the payouts to shareholders and employees.

Since their very existence is dependent upon public money, are they really private enterprises? If they are not private enterprises, then why are they acting as if they are?

From the article-

So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.

and another quote from the same article-

Yves here. Ambrose Bierce, in The Devil’s Dictionary, described a partnership as “When two thieves have their hands so deeply plunged into each other’s pockets that they cannot separately plunder a third party.” Pointing out that banks are de facto partners of the state, enjoying substantial privileges (that unlimited checkwriting on official coffers when things go bad, the ongoing subsidies, the lavish private sector pay) without commensurate duties opens a huge can of worms. It goes beyond the usual, relatively anodyne “privatized gains and socialized losses” and opens up the terrain of “What do we mean by private enterprise?” Part of the American ideology is that there is a hard line between government and business. But entire industries suck off the state with far too few strings attached. The black/white distinction is illusory; what we instead have is a gradient.

But looking hard at the degree of looting and abuse of taxpayers, particularly in light of lavish CEO pay, not only raises uncomfortable questions, but calls for remedies that are politically unpalatable. Even though the state is deeply involved in enterprise, our ideology is that explicit industrial policy or other forms of involvement is a bad thing, the government will screw it up (when in fact some foreign governments do a decent job but we’d never deign to learn from them). So we’d rather limp along with a defective and increasingly costly model than challenge deeply held political beliefs.

Comments?

  1. dhelmet
    September 15, 2010 at 4:19 pm

    Are you familiar with Austrian economic theory? They certainly recognize the fraudulence deep in the core of the modern banking system. Of course, they are generally associated with those dreadful libertarians, even if Austrian economics does not necessarily lead to libertarian conclusions, so maybe you’re not interested.

    Austrian economic theory is the best argument for incinerating Austrians.

  2. Mike
    September 15, 2010 at 5:18 pm

    Brilliant find, man. Thank you.

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