To nationalise or not to nationalise

Curious, is it not, that it was 20 economists who wrote an open letter calling for the guaranteed banks to be nationalised? Not a left-wing politician or a trade-union leader among them.

True, the Labour Party also wants the banks to be nationalised, and the trade-union movement would be unlikely to object. But their arguments are economic too, and much the same ones as used by the 20 economists. It is left to the Socialist Workers Party, with its ubiquitous posters wrapped around the lamp posts, to argue that nationalisation would be a good idea in itself.

The Labour Party’s implicit position is that nationalisation would be a temporary affair, in the same way as the economists saw it. The idea is that, if the banks were taken over, lock, stock and smelly barrels of development loans, we would not have to worry about what those loans were actually worth.

They would belong to the State and whatever they turned out to be worth, the State would collect it in the end. It could then reprivatise the cleaned-up banks for that worth.

Schoolboy sense
All of this is designed to make sure the taxpayer does not end up the odd €10bn short at the end of the process. An admirable objective, no doubt, but it took a letter from a schoolboy rather than 20 economists to highlight the huge savings to be made from nationalisation right now.

Tricky business for the layman, banking. To the uninitiated, it may seem odd that those development loans, however much they are going to cost the banks, are ‘assets’. The State will probably pay more than €60bn for them. If it also took over the banks’ ‘liabilities’, the bill would be a fraction of that. And the main liability is the juicy cash that the customers keep on deposit.

Some €60bn for a load of loans of uncertain value. But just a couple of billion for the same loans, along with oodles of cash. Okay, there would also be a lot of debt but, like the deposits, that is guaranteed by the State anyway. I am a bit surprised that this great immediate saving did not appear to get more traction in the Department of Finance. Or if it did, little word of it got out.

Not that such arithmetical sleight of hand necessarily makes nationalisation a good idea. Yet, as we clamber around the smoking wreckage, there would seem to be an unanswerable argument that privately owned banks, subject to official regulation, are not a terribly good idea either.

That, after all, is why a nationalised banking system was once a core principle of parties of the left. Of the three famous imperatives of socialism – the means of production, distribution and exchange – only the ownership of the means of “exchange” made much sense to the ideologically uncommitted. Banking is not only central to the functioning of the economy, as we have just found out yet again, but it also has the capacity to wreck the economy in a way that making steel or running railways do not.

Yet the 1945 British Labour Government nationalised steel, coal and the railways, but left the banks in private hands. The power of the City of London, no doubt, had a lot to do with that. Other countries, including France and Germany, ended up with large state banking sectors. Alas, the results were little better than those of coal, steel and railways.

Europe’s biggest banking collapse to date was that of Société Générale, a state bank. The state-owned German Landesbanken is among the worst casualties of the current crisis. State-owned or not, it is depressing to read that expected current write-downs in boring old Europe’s banks are close to a trillion dollars, while they are about half that in the supposedly red tooth and clawed America.

Dangerous business
Banking is always a dangerous business. Left to their own devices, bankers will always lend to the wrong people in the end. That is why they should never be left to their own devices. Prudential regulation is not difficult, provided the regulators never succumb to that most dangerous of beliefs – ‘This time, it’s different’.

Politicians, left to their own devices, would always lend to the wrong people. But one cannot regulate government. It is difficult to keep even it in its place. There was always an uneasy feeling that Anglo-Irish and Irish Nationwide were a bit too close to the political class.

Anglo is now nationalised, and Nationwide in a state-protection programme. The most striking thing is that this makes their operations completely opaque. Anglo reports record losses, but does it matter? The Government puts in more capital, but, whether a good idea or bad, the only reason it can be done is because it is state-owned. A bank that should no longer be in business carries on, but it is no longer – in any meaningful sense of the word – a bank.

So the Irish left deserves credit for not aspiring to have permanent state ownership of banks. It can, however, apply its mighty intellects to the question of what kind of banks will emerge from this process. Even during the bubble, the Central Bank pointed out that sources of future profits for the Irish banks outside of the property market looked thin on the ground.

Everyone wants the banks to take less risk – including the banks. But there may not be a viable business in risk-free banking – not without higher charges and lower staff costs, anyway. It is bad enough that the banks are now restricting credit growth to what their balance sheets can bear. One can imagine the furore if they start upping their charges and cutting their workforces. That is because their behaviour has made them seem not only wicked, but positively alien. Owning the banks is not the same as ‘taking ownership’ of them. Somehow, as a society, we have to find a way to do the latter, while striving to avoid the former.

This article first appeared in Irish Director magazine