Bank Nationalisation

Karl Whelan’s case for nationalisation is very powerful but we shouldn’t lose sight of the dangers that were traditionally uppermost in our minds.  (This does NOT equate to support for the Bacon plan).  Even commercial banks are subject to strong political pressures.  Remember the write-offs of Haughey’s personal debts, and even of some of Garret’s? (Though the similarity ends there, as the Moriarty Tribunal found.  While Haughey’s assets remained intact, FitzGerald’s write-off occurred only after his assets had been exhausted).  It would be much more difficult for a nationalised bank to resist political pressures (or do we really believe that “crony capitalism” will end with the current crisis?).  Quite apart from the other problems with the post-dated levy idea, as identified both by Karl and the FT, it is easy to imagine that it would be applied only very leniently, if at all, for political and pressure-group reasons; the same dangers that arise in the case of nationalisation.  Sweden seems to have a different political culture.  And would a nationalised banking system be able to resist demands that there be no foreclosures on defaulting mortgage holders?   I doubt it.  What would that do to Karl’s figures? These problematic governance issues need to be carefully considered.

12 thoughts on “Bank Nationalisation”

  1. I agree with Frank that there are some delicate political economy issues in relation to nationalisation. I would hope that these issues can be dealt with by having the banks run by highly independent boards of very senior figures of high integrity, charged with a clear mandate to clean up the banks and return them to private ownership in a reasonably short time frame for as high a stock price as possible.

    Beyond that, I’ve heard a lot of arguments in the media today against nationalisation, some good, some not so good. This is progress, since it seems to me to be the first time the question has received serious discussion. In any case, I’m planning to write something that addresses these issues.

    At the end of the day, even acknowledging the potential problems, I would still portray nationalisation (like democracy) as the worst option apart from all the others.

  2. Gosh, it would be shocking if nationalized banks gave corrupt, sweetheart deals to insiders. The existing system should be maintained at all costs to ensure nothing like that ever happens in any way.

  3. Frank and Karl, you raise very important issues.

    Based on the “Abridged Summary,” the Bacon Report is surprisinlgy weak on the relative merits of nationalisation versus majority government ownership. The sole reason offered for favouring the latter — which seems the inevitable outcome under the Bacon plan — is ease of divestiture. This is a valid consideration, but surely not the only one. What about differences in governance (notably the political risk Frank refers to) and also in loss allocation under the two structures? Maybe these issues are considered too sensitive. But the public deserves a more robust defense and explanation of the favoured policy.

    There also needs to be more discussion of the governance of the asset management agency. The NTMA is widely viewed as an impressive organisation. But there is no getting away from the fact the investment policy of the NPRF has been throughly politicised. Why should we believe it will be different with the NAMA?

  4. Off-topic, but just wanted to let your readers know that an item by Derek Brawn, author of ‘Ireland’s House Party’ is to be broadcast on Prime Time this evening. Might be of interest to your community considering his background as an analyst etc. Undoubtedly his film tonight will be pointing a finger at the seller side, and I agreed to contribute to put forward the caveat emptor argument and point the finger instead at the state for lack of information and regulation rather than at business for being profit-seeking and capitalists for being greedy. I’ll be posting something more detailed about the book on http://www.myhat.ie/blog, if any of your readers are interested in a cultural rather than economic take on the property market.

  5. I haven’t noticed any comment about the scale of the intervention by the Swedish Government in 1992. Their input of approximately €14 billion, at current values, was the equivalent of 4% of the country’s GDP in 1992 – not a commitment equivalent to over 50% of GDP as is the case in Ireland.

    Swedish banks wrote down their losses and issued equity to the Government before recapitalisation was provided. A critical compoent was obtaining the last possible cent from shareholders. This meant that the Swedish public believed there was some potential upside for them and this turned out the be the case when nationalised banks became public companies subsequently. The net cost after this was less than 3% of GDP.

    Our Government would need to educate the Irish public as a whole about their intentions and be proactive about attempting to win their support, or at least their tolerance! It would be very unwise to this issue to be cast as some form of opaque art if an angry, embittered or confused public response is not to ensue.

  6. @ Brian Lucey, but isn’t politics about who shouts the loudest. And tells the best stories.

    Seen as we have been so easily controlled by Liam Delaney’s behavioural suggestion earlier, perhaps we should be looking to Akerlof and Shiller’s argument for stories being more effective than data in effecting economic outcomes. (ref animal spirits)

  7. @ben
    Tell us a bit about your background, ben? You seem to be righteously cynical? You may find my contributions familiar, eh? Ex-Gov? Pollie? Banker maybe?

  8. @Myles Duffy
    I suspect that their banks were better run in the sense that they would not open 125 separate deposit accounts for a taxpayer, who deposited Pounds 150,000. The reporting limit per customer in each branch meant Revenue would be tipped off if all was left in one account. Banks had to let us know when more than Pounds 70 was paid in interest in any year. One year, Finance changed the limit to Pounds 50. Ooooops! Some cases were so slow to settle and so large, they qualified for the 1992 Amnesty!
    So perhaps this helps us understand why the banks cannot be liquidated or nationalized? Too much would come out.
    I know, house all their records in a skyscraper and have a plane crash into it! Oh, probably not, who would do such a thing?

  9. @Brian Lucey
    The politics is all about the money paid to those in politics….read my posts!

  10. @Paul O’Connor

    When the government is supported by developers who are funded by tax evasion facilitating banks, what hope do the plain people have?

    They get the government they deserve. They must have been bloody awful!

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