Let’s start with what I see as the single best argument against nationalisation. The vast majority of economists get very worried when public ownership of banks is brought up because, as Frank Barry discussed yesterday, nationalised banks are particularly likely to be subject to abuse by politicians and their crony capitalist mates.
Executives in nationalised banks, who owe their appointments to the government, may find it difficult to resist pressure from a Minister to make a loan to someone that has lobbied the government or that has a political relationship with the governing party. Even beyond direct linkages with the ruling party, it is hard not to get queasy at the thought of opposition deputies castigating the government for the fact that it didn’t get its banks to lend to failing companies in their constituencies and governments giving in to avoid political flack. These pressures may lead to further bad lending and to losses that fall again on the taxpayer.
In favouring nationalisation, I don’t want to belittle these concerns. They are valid and important. I think that they need to be addressed in the design and operation of any nationalisation scheme. I would make five points on this.
First, nationalisation of the banks needs to be seen as a temporary emergency measure. We should have an explicit goal of having the banks back in private ownership in no more than two or three years time. If, as I have proposed, this is done in conjunction with an asset management agency to take bad property loans off the books of the banks, then I believe the Irish banks will be an attractive proposition for private investors within a couple of years.
Second, the banks need to be run as independent semi-state operations headed by highly independent boards of senior figures of the utmost integrity. These boards should be charged with a clear mandate to clean up the banks, improve risk management practices, and return them to private ownership in a reasonably short time frame for as high a stock price as possible. This would most likely see substantial changes in senior management in these banks. Personally, I would then incentive the new senior executives of the banks with pay contracts with modest base salaries and stock options to purchase shares in the banks when they are spun off again.
I know that some will be sceptical about how independent these banks could be but we have a tradition in Ireland of independent semi-state bodies and agencies. For instance, the Minister for Health declines to answer most questions about operational issues on the grounds that these decisions are taken by the HSE. (Say what you want about the HSE, my point is not about whether it is good or bad at what it does, just that the Minister can plausibly brush off micro-level operational issues as not being her business)
Third, it should be recognised that we are where we are and that the Bacon approach will lead to the state having a deeply entangled relationship with the banks for years. Partial state ownership is already happening and the Minister concedes that majority ownership is possible. We have also put state liability guarantees in place that could last for years. In my view, a program of nationalisation, cleaning up and re-privatisation, is likely to see a faster return to full private ownership of the banks than the government’s current approach.
Fourth, those worried about crony capitalism should consider the potential losses to the taxpayer coming from the pricing of the bad loans by NAMA. Lobbying on the part of financial institutions for a small haircut on the bad loans has already begun. We are relying on NAMA to protect the taxpayer but we do not yet really know who or what NAMA is. The Tanaiste’s quick dismissal of opposition questions about how prices would be set with the observation that she doesn’t know anything about that because NAMA will be setting the prices, did nothing to reduce my concern about this. (There is the potential future levy to recoup costs but, as I’ve written before, this may never happen and probably wouldn’t actually recoup the full economic costs.)
Finally, it is important to recognise that issues relating to corruption and crony capitalism in banking go well beyond nationalised banks. Banks have always relied on an implicit state safety net and, as Frank noted, the Haughey-era abuses involved commercial banks. Because of recent events, the implicit state safety net of the past has exploded into an explicit blanket guarantee of all liabilities. For these reasons, whether we end up with partial state ownership, majority state ownership or full nationalisation, banks will need to be monitored as never before and their relationship with governments closely regulated by independent authorities.