I see the Awesomeness.
Okay. I don't see any holes besides the whole "convince everyone to do it" thing.
Fight smart, not fair.
Flying Dutchman
Indeed. Filed under "good, politically impossible ideas," right next to abolishing the private military-industrial complex and ending political donations.
"Can ye fathom the ocean, dark and deep, where the mighty waves and the grandeur sweep?"
scratching at .8, just hopin'
What I would give to see this happen. Hell, it'd make a good foundation to a New Deal v2.0 if things get bad enough.
Share it so that people can get into this conversation, 'cause we're not the only ones who think like this.
So basically it's just a non-profit bank.
Flying Dutchman
A non-profit bank with functionally limitless funds to borrow out and a structural incentive to help the middle and lower class.
"Can ye fathom the ocean, dark and deep, where the mighty waves and the grandeur sweep?"
It also helps a lot in "high sunk cost" industries such as manufacturing to allow a group of workers compete with already established industries. Like, how do a group of farmers afford expensive machinery that might cost in the 10s of millions? They usually have to sell out to an agricultural megacorp like Monsanto.
Instead, they can turn to the government for a income-tax-repaid loan and try to be profitable like that.
On the flipside it also allows micro-loaning in poor neighbourhoods to boost economic productivity. They don't have to be ignored by larger banks who have little profit margin off these guys.
EDIT: I wrote up a more detailed version of my idea here: http://politicallyuntenable.blogspot.com/
edited 7th Jun '12 1:27:52 PM by breadloaf
Two problems that I see: One- this bank operates like a business, yes? It's expected to make a profit and pay that to the government, which owns the shares? Then to the extent that this bank takes on loans that are riskier than what other banks cover (low fees, micro-loans, no minimum balance, widely available branches and operating in low-income neighbourhoods as a low-value bank) it stands a higher than average chance of ending up with a lot of unpaid debt. If there is no chance of a gov't bailout, then how will it stay in business?
Two: To the extent that this bank has access to resources that other commercial banks do not (the whole 'no interest' thing) then it's going to steal business away from other banks and weaken the industry. If it doesn't go bankrupt it could go the other way and end up as a monopoly.
Finally, can Congress keep it's hands off this and not use it as a tool to implement political agendas?
Wouldn't it be easier for the government to simply guarantee loans (or subsidize them in other ways) made for these purposes by normal commercial banks? That's how we expanded home ownership after WWII, for example.
Yay, somebody who disagrees.
Okay I'll address these points.
It's not expected to make a profit and profit is not returned to the government. That would be unusual for a "crown corporation"/state corporation. That's not how it is ever run. It is however run like a business.
It can offer tiered service, which most banks do, where if you have low amounts of money it offers less services for the lower fees. There isn't that much the poor really needs a bank to do except to park the money there so they don't walk around with a fat roll of twenties.
If we ignore the investment services for a moment, the chance it ends up with a lot of unpaid debt, relative to other private banks is far lower. I'll hit each point...
- Low Fees: Private banks have stated that makes up less than a percent of revenue, so low fees shouldn't really hurt profit margin. (This is a statement from Canadian banks which generally have higher fees than America)
- No minimum balance: Again this makes up nearly nothing of revenue anyway.
- Widely available branches: Poorer neighbourhoods have lower rent costs and you can provide less services there since the poor typically have less banking needs. I do concede this may cause some profitability issues though I'm unsure of the extent. You can say it will be worse than private banks.
- Micro-loans: These types of loans have the highest repayment rate of all types of loans, so trying to argue the poor won't repay these is an argument refuted by current statistics. I believe that the UN has said that repayment rates are about 96%. That is obviously incredibly profitable.
Now, let's move onto the investment services which is where the "no interest" thing comes in. I'll put a few caveats on how the service works:
- Bank has limited funds to which it can invest, it's acting like a venture capitalist but for the middle class and below... this is not a market in which it competes with private banks
- The bank is not supposed to receive government funds for anything but investment, thus if private banks can't compete, they don't deserve to be in business (especially, as you pointed out, it operates in low-profit neighbourhoods)
Next, paperwork and bureaucracy has its reason. In this case, there's a paper trial for all investments and why they were approved. It's up to voters to vote out corrupt congressmen, and to listen to the Auditor General who keeps up with the bank. If voters don't care, your problem is voters who don't give a crap their country is going down the drain and not the banking policy.
Finally, as for subsidizing private banks to provide these services, you can do it for some services but not all services. For instance, with respect to huge investments, you're trying to give the opportunity to 200 blue collar workers. Will Wells Fargo give out a loan repaid via an income tax? Can we have the stipulation of "the pay differential in this company cannot exceed 20"? You can argue you don't care about those aspects, in which case you can back these loans, but it's a matter of backing banks to give these loans to middle class and lower. That is something I'm quite sure they're structurally incapable of doing.
edited 7th Jun '12 1:50:37 PM by breadloaf
This is going to get really long, really quick....
"It's not expected to make a profit and profit is not returned to the government. That would be unusual for a "crown corporation"/state corporation. That's not how it is ever run. It is however run like a business."
Well, if it doesn't turn a profit, then it must be subsidized by tax dollars. So that really is unfair competition.
"Low Fees: Private banks have stated that makes up less than a percent of revenue, so low fees shouldn't really hurt profit margin."
I think you will find that is because all banks invest the money they hold. That's where the money to make new loans comes from. If this bank has access to tax money for this purpose, then yes, it would be able to keep fees down, or even eliminate them entirely. Same with interest, and all other forms of profit making. But that really will make a monopoly out of this bank, no one else will be able to compete.
"Bank has limited funds to which it can invest, it's acting like a venture capitalist but for the middle class and below... this is not a market in which it competes with private banks"
The reason why micro-loans arent more common over here is because the cost of living is so high in America. A couple of hundred dollars isnt going to make much of a difference to an American, even one below the poverty level. Even in a poor neighborhood, it takes about $10K to open a new business.
By "invest" I presume you mean "loan out". You seem to be implying that you will cap the amount that can be loaned to any one party, but earlier your example involved "...a solar panel factory [which] might cost a billion dollars..." A billion dollars is a hell of a big loan. Even at a fraction of that, you are definitely competing with commercial banks. Unfairly.
"The bank is not supposed to receive government funds for anything but investment, thus if private banks can't compete, they don't deserve to be in business (especially, as you pointed out, it operates in low-profit neighbourhoods)"
I'm lost. What does a bank do except invest money? That's how they can afford to pay interest on an account. If this bank isn't paying interest, even a poor person has no reason to open an account there. If all it is doing is loaning out public money for development projects, it already does that- there is no need to create a special bank for that purpose. All you really want is for them to expand the program they already have and provide more loans to people.
"Next, paperwork and bureaucracy has its reason. In this case, there's a paper trial for all investments and why they were approved."
Again, that's already the case. But the "paper-trail" is complicated, and only a dedicated auditor would be able to figure it all out. They do it that way for a reason, of course, which has nothing to do with being accountable to the public. That's me being cynical.
"Finally, as for subsidizing private banks to provide these services, you can do it for some services but not all services. For instance, with respect to huge investments, you're trying to give the opportunity to 200 blue collar workers. Will Wells Fargo give out a loan repaid via an income tax?"
No, but it isn't difficult to think of incentives that would convince Wells Fargo to offer such a loan.
"Can we have the stipulation of "the pay differential in this company cannot exceed 20"?"
You mean the solar company, not the bank, right? In that case, yes, if WF wants the incentives, they have to meet the criteria.
"That is something I'm quite sure they're structurally incapable of doing."
Oh, no, not at all. You yourself pointed out that micro-loans can be profitable. It's competition between the banks that prevents them from taking risks on poor people, not structural issues. Cushion them from the low profit margins, and they can play ball. The real problem is a lack of political will.
It's a complicated topic so yeah, it'll get long real quick.
@ Profit
That doesn't make that much sense and I think that you are ignoring how most crown corporations are run.
- CMHC (Canada Mortgage and Housing Corporation): Not tax funded, non-profit, still profitable.
- LCBO (Liquor Control Board of Ontario): Makes billions in profits each year because people must have their booze :P
- CP (railway company): Not tax subsidized and runs on its own money.
In fact, the vast majority (it's easier to list out companies that do need tax money because the list is so short) that actually requires tax dollars to keep afloat. I concede that they'll monopolise the market fairly quickly because they're just so much better to do business with. But in that case, what's the problem? You hate good service for low prices? :)
@ Investing
Banks invest all their money, but they don't necessarily do it safely, nor do they have to target all markets. Not everything is as profitable as every other sector of market. People don't sell iPhones in the ghetto community (though I hear burners are sold a lot). The basic reason banks don't sell their services in poor communities is because the profit margin is too low for them to justify the added infrastructure in doing so. It's a structural issue.
We could provide incentives for them to provide their services, in which case, I would ask you to expand on your idea on how we might do that then. I prefer that if we're just going to be subsidizing a bunch of private corporations, why doesn't the government just do it themselves and cut out the middle man?
@ Micro-loans
A few hundred dollars can be very useful and nearly no bank offers it despite the statistics showing the next to non-existent default rate. I have no idea why they don't do it. And it's not usually nothing.
Micro-loans are to help poor people purchase something they need to make money. Maybe they are short a few hundred to make car repairs, but it's not that they don't completely have no money. It's just a little addition to their wealth, temporarily, to get them out of the rutt.
Banks don't do it and if you have the reason why they don't do it, then I like you to expand on what type of policy you would envision to get them to operate in low-income neighbourhoods.
@ Investments
Banks loan out money in specific ways, none of which even come close to the way I've described the government venture capitalism works. In general, a group of people cannot get money. And in general, large loans to start up massive factories aren't really done by banks.
In particular, most venture capitalism is based on a "people network", so those with money and connections tend to be able to secure funds for starting high-sunk-cost businesses. In my example for a solar panel factory, a billion dollars is a lot of money. Venture capitalists won't give this money to the poor or middle class and banks aren't really involved in massive loans of that scale except to already established organisations (in order to reduce risk).
As this is money the government "sets aside" for performing investment services, that might be "unfair", but so are any tax incentives, business grants, R&D tax credits or a myriad of other government tactics. I just think that this is a much more effective way of creating jobs than the others I just named.
The particular rationale I have for this is that if a group of workers think they can outdo a Chinese corp in producing solar panels, what do they do? Only the government is willing to risk it for them. It's a market untouched by the private sector so if you're concerned about lost business to banks, none exists. Banks don't invest their money here.
Essentially I'm saying that, while you argue banks invest nearly all their money, I'm saying they don't invest in these sectors therefore I'm touching on a sector that private industry has ignored.
@ Cynicism
It's not really all that difficult. In fact, the primary motivation for clearer paperwork and more transparency is ushered on by voters. You look at Canada, our auditor general shifted through the mountains of paperwork and lack of paper trails and still found Bev Oda wasting taxpayer dollars staying at 6 star hotels, or Mac Kay blowing 47 000 dollars on a vain "hero shot" photo op.
The thing is, if the bank's paper trail is really hard to follow, voters get angry and demand that the paper trail get clearer. I'll try to be cautiously optimistic that voters/people know to press their government for the right things to improve.
EDIT:
Also is your primary concern about the politically untenable nature of government run projects? Because given how we just went through a phase of all of America's banks require gazillions of dollars to keep afloat, I really don't trust them.
edited 7th Jun '12 4:52:03 PM by breadloaf
Flying Dutchman
I, for one, would be totally ok with using such a government bank to run all the private vultures out of business, and then simply treating it and regulating it like a technical monopoly.
"Can ye fathom the ocean, dark and deep, where the mighty waves and the grandeur sweep?"
Indeed, so would I. If they can't compete with a government-run business on business grounds, they don't deserve to exist.
Also, if necessary, I would separate the banking and investment divisions just to show that if banks fail against just the banking services division, then they don't deserve to be in business.
However, I'm not clear on the exact concern that De Marquis has with government-run bank services so I'll wait for him to expand on that.
Quick response now- detailed response tomorrow.
In general, markets aren't stupid, although they are greedy. If a particular opportunity is not being exploited, there are usually reasons that make sense from the perspective of the market. In this case, although it is possible to design a business model in which a small profit can be made by loaning to the poor, that doesn't necessarily mean that such a model is competitive. Commercial banks sell shares on the stock market. Any bank that focused it's limited resources on high-risk, low return loans would eventually be bought out by another bank with a more aggressive strategy. Unless there is some other incentive to make up for that.
If, as a matter of federal policy, we decide we want more personal loans to poor people, or more loans to employee-owned start-ups, then the government can best insure that by itself offering low-interest long term loans to banks that promise to use that money to make those kinds of loans. You may be aware that that is how the federal gov't controls the money supply- by making loans to banks and charging a certain interest rate).
I'm not sure what 'infrastructure' you think commercial banks lack that they need to make loans to poor people, or employees. They already make loans (very often to poor people, that's how they get mortgages), they just need to offer a new kind in addition to the ones they already make available.
Of course, if you are comfortable replacing a private industry with a government monopoly, then none of that matters. The main problem with nationalizing financial services in general is that the government, without access to a private market, has no real way of measuring risk. Without an accurate assessment of risk, there is no way to know what interest to charge, and the system ceases to be self-sustaining. Basically you have to hope that the rest of the economy is successful enough that taxes will make up for the inefficiency. And that's not even taking into account the problem of political interference, which given the sums involved, is nearly inevitable (I'm being cynical again).
Now, if you want to offer loans that the private sector is unwilling to make, well and good, but that ensures that no private entity will ever make such loans, and remember that private markets are better at creating self-sustaining economic systems. It will always operate at a loss to the tax payers (but will be good for the poor- I grant you that). Most economists (including progressive ones like Krugman) feel that its better for the government to encourage the private sector to offer any services that can be offered that way.
I'm still confused regarding your solar panel factory. Such factories do exist, and they did find funding, so it isn't true that the private sector wont touch such loans. They will if the business model indicates a respectable return for a reasonable risk. The reason that more employee owned factories are not funded is because it is very difficult for 'middle class' employees to gain access to all the inputs and infrastructure that such a enterprise requires (lining up a supply chain for example, or a big customer contract to get started). Large-scale investors have much better access to that sort of thing. You may be right that it isn't banks specifically that handle these kind of deals, but there are specialized entities that do, and by and large they are very good at it. Again, it would seem more efficient for the government to simply offer incentives to these kinds of deal brokers for the purpose of encouraging the types of business ventures you want to see. I can think of all kinds of tax breaks that would get things going.
The real problem is politics, not economics. I see no party or faction in Washington that seems willing to buck Wall Street in favor of the '99'. Even the Obama admin spent billions to bail out the largest banks, but offered no real mortgage relief to home owners. Its a problem.
I think it is difficult to defend the "markets aren't stupid" in light of the massive recession we are facing primarily due to the market being idiotic, and ten years ago was the "savings and loans crisis" and before that yet another crisis. In all cases, loose regulation and lack of government intervention was the primary reason for the market to fail dramatically. So I basically have no confidence in the market being intelligent whatsoever but I think that in many cases it is cheaper than hiring an army of bureaucrats.
So firstly, you've made the assumption that government-run organisations are inherently inefficient and tax dollars "must make up for that", but that is a statement that needs to be proven. I've named many Canadian crown corporations (CMHC, CP, LCBO... for organisations who started failing after being privatised but were successful beforehand... Bell Canada, Nortel, Petro Canada, Air Canada) which are all highly efficient and profitable without a cent of tax dollars going into them, and they're all meant to not be run upon profit incentives. Secondly, I think that you might need to put a lot of restrictions and oversight onto handing money to banks to perform low-interest loans to the poor, as well as oversight as to the structure of those loans and so on. With the significant amount of overhead required to ensure money given to banks is not misused, I'm a little surprised that you would think a bank conducting the business directly would somehow be less efficient than that. Additionally, it's far easier to legislate more transparent banking practices with a government run organisation than it is with the private market.
Actually, poor people should not have been receiving the mortgages that the banks gave out and the primary reason they got them was due to lack of oversight by the government. We are, afterall, in the "subprime mortgage" mess. That's the problem with banks is that they don't interact with the poor in a manner that makes sense long-term. You can mandate a government bank to do so. But, as you say, we failed the poor and middle class in the subprime mortgage mess due to a colossal failure in American politics.
Now, as you say, private systems are usually better at creating self-sustaining economic systems to a point. Afterall, we still regulate them (or should regulate them) and we have all sorts of tax incentives/credits, grants and so on. Upon analysis of actual market behaviour, the vast majority of incentive-policies fail utterly. Corporations pocket the money and lie about it, and there isn't a good way to claw that money back. For instance, R&D grants given by governments are typically swallowed up 100% of the time. Does it ever increase any ACTUAL R&D? Nope. Stat Can and American statistics do bear this out. So I don't think that trying to place incentives for banks to help the poor result in the right situation. Heck, part of the blame on subprime mortgages was how certain government incentives exacerbated the situation (essentially, the banks used the tax incentives and other money incentives and then perversely used it to back up bad loans).
Also, the main reason big banks don't do micro-loans or operate in poor neighbourhoods is primarily due to the swallow up effect you are talking about. Those types of activities makes you small fry and if you're small fry, you'll get bought up and do big bank stuff. So essentially, the market inherently "corrects" any bank trying to do small time stuff.
I think that the way you've describe the solar panel factory means that my point was not explained well enough.
Basically, when a company establishes itself in a particular market, the market entry barrier is very high. It's exceptionally high in a high-sunk-cost industry. In the example of a solar panel factory, the situation is like this:
- Upper class individuals with their connections were able to secure funding in order to start a solar panel factory. They pay workers $1/hour in India producing crappy solar panels and flood the market with this trash.
- There's a significant number of middle to lower class Americans with the capabilities to produce good quality solar panels, using an automated factory rather than brute force labour but they haven't the capital to start their business (high productivity will make up for the cheaper labour in India)
- No bank is willing to loan a billion dollars to a group of 200 blue collar workers (with a few white collar guys to run the business) because they're all just middle class people
- Government bank steps in and assesses them and thinks "Yes I think you can indeed make an automated plant work well and sell high quality solar panels that can compete with Mr. Outsource"
- These workers, if successful, now are highly paid American manufacturing workers and it keeps jobs in America in a sustainable non-protectionist way
My main issue with "incentivising" the private market with doing the things I describe is that private banks are only out for profit. If I give them a billion dollars to invest in various business, and you're concerned that a congressman might be trying to porkbarrel investment money, what would private bankers do who have zero impediments to immoral acts? They are, in fact, designed to act immorally. I'm quite sure it'd just become some perverse crap. If I'm going to be cynical, I'm more cynical about the intentions of a private organisation given lots of government money and subsidies versus government-run initiatives.
edited 7th Jun '12 8:33:31 PM by breadloaf
Government banking? What could possibly go wrong?
Flying Dutchman
Everything. Or nothing. It all comes down to effort.
"Can ye fathom the ocean, dark and deep, where the mighty waves and the grandeur sweep?"
I'm mixed on the issue, TBH.
Flying Dutchman
I feel like it's a brilliant idea in theory that would work very well for maybe a generation or two before entropy and corruption conspire to ruin it.
So... Social Security 2.0.? I guess that's a reasonable analogy.
edited 7th Jun '12 10:07:20 PM by DerelictVessel
"Can ye fathom the ocean, dark and deep, where the mighty waves and the grandeur sweep?"
@breadloaf: Microloans (at least, the ones the U.N. was talking about) are not "a few hundred dollars for immediate needs." They're "a few hundred dollars to start a business with," which is a much different ballgame. It's normally something done in poorer countries where a few hundred dollars goes a lot farther than it does in the US.
What you're talking about is called "payday loans," which are a different ballgame; they're for poor people who are living mouth-to-mouth when something critical comes up and they have no savings to draw on. Or to quote Cracked, people who go to payday lenders are people who have to decide which fucking provides the most lube. These have a very high default rate, and I'm not sure the government should get into this business at all.
@ Ramidal
Yeah, I know what you mean but part of the default rate is due to the 500-1000% interest they charge, and unfortunately I'm not even making up that number. If they got a more reasonable prime rate, they would be more able to afford the loan.
Additionally, even the small 10k loan for small businesses (such as some shop) is what big banks still don't provide in those neighbourhoods.
Now I understand it's inherently risky to deal with the poor, but the way the big banks have done it was by ignoring income requirements and assets... essentially handing out NINJA loans. The government on the other hand can take on risk in a more structured manner. So there's two things I'd like to combat:
- Elimination of pay day loans in general (I would just outright ban interest rates in excess of a certain amount above prime)
- Micro-loans for small businesses tend to be in the thousands, rather than the hundreds inside America, but the principle remains the same. Give them money to start a local business.
Creation of an alternative to pay day loans, with are the micro-loan structures. The interest and repayment of that can be structured a bit differently (avoiding the usual types of defaults). These include certain tax manipulation schemes and credits and so on. If a guy's car breaks down, one of the most usual unexpected costs, and he has no money, his choices are to take a bad payday loan (which kills him for the next month) or to give up and go homeless. While it's riskier than the micro-loan business side of things, I would like a "way out" for these people.
That said, there's a limit to how much of that you can do. But, so long as the reserve requirements for the government bank are higher than usual, they can soak a bunch of bad defaulting loans while bolstered by their other investments. Essentially, having a bunch of Tier 1 assets allowing them to do a greater and greater amount of high risk small time loans. The reason the big banks failed due to subprime loans was because they were taking on so many bad loans, very far in excess of their reserve capital to be able to soak the losses. Besides, the government banking isn't handing out blanket cheques to people. It's giving them precision loans for affected people.
@ Tomu
Think about it like this. If you're thinking "but a bad government means a bad government bank". A bad government means bad anything no matter what.
edited 8th Jun '12 12:05:20 AM by breadloaf
It's more along the lines of I'm cautious as to whether or not the government can allocate resources efficiently in a global sense. I'd like to see some data. I mean, obviously, communism has been a bust, but then we get some European countries that are relatively heavily socialized and they're doing quite well, so it's worth looking into.
Well the general idea is that we hit banking markets that have been untouched by the private banking sector ever since the 50s. I'm trying to tackle what I see as a "gap" in the market due to low profit margins and profit-motive problems.
In this sense, we're allocating resources to tackle issues that big banks are never going to care about. Low-scale and micro-loans. Big time investments with small time customers.
I've noticed that many Americans believe a person needs to be "hungry" (in the economic sense) to be productive. If they don't feel that hunger, afterall, they won't have that motivation to move ahead, succeed, innovate or be productive. But statistics don't bear out. Sweden, one of the most socialist coddled western nations, is also one of the most productive societies. They also produce many of the world's latest technologies and are at the forefront on a number of research subjects.
This is all about precision use of government money in areas untouched by the private industry in order to maximise productivity across the board. If corporations are going to hoard their money and do nothing with it, or to have that tiny trickle down effect from the luxuries purchased by the so-called 1%, then we tax them and move that money into the hands of people willing to build new factories, make new products or just be much more efficient than current companies.
The modern purpose of a bank is for idle money to be invested in those who want to do something with it. If they're missing out certain sectors, or money is being left idle in some way, I think we should tackle that inefficiency.
edited 8th Jun '12 12:26:54 AM by breadloaf
Works. I'm not going to come out strongly in favor of it, but that's a sufficient argument to make me be cautiously optimistic to the idea (though, obviously, never gonna happen in the US)
Geez, I'm getting too old to keep up with this anymore...
@Breadloaf/15: "I think it is difficult to defend the "markets aren't stupid" in light of the massive recession we are facing primarily due to the market being idiotic..."
Oh, the market isn't perfect by any means. It is highly vulnerable to psychological bias, which leads to boom and bust behavior, bubbles, and the rest. The market alone cant regulate anything, not even itself. But at least it provides clues. Outside a market, what measure of risk and value is there? And if a gov't monopoly is just fixing prices with no relation to true market value, then that just sets up the conditions for a black market to arise.
"So firstly, you've made the assumption that government-run organisations are inherently inefficient and tax dollars "must make up for that", but that is a statement that needs to be proven."
Not "inherently", no. I'm not familiar with your Canadian examples, but there are many situations in which a gov't monopoly is the best way to provide a service. Police protection, for example, or a power utility. This occurs when the service provided requires a physical infrastructure to cover a specific territory, and therefore duplicating the infrastructure (to provide real competition) would be wasteful. That might apply to any industry that required pipes, or lines, or vehicles to deliver service. That's why national airlines often work out well, for example.
There is also the case where efficiency (profitability) isn't the highest priority. Taxpayers are generally happy to subsidize a military, for example, because we want the military to be maximally effective, not efficient.
But none of that applies to banking. Logically, a business either pays for itself, or it doesn't. If it doesn't, then it either goes bankrupt, or it must be subsidized somehow. The same applies to gov't programs- either they pay for themselves, or they must be subsidized. So- if your gov't banking monopoly isn't charging sufficient interest to cover it's risks, it cant be profitable in the long term, and tax payers will have to make up the difference. If it is charging sufficient interest, then I cant see how this monopoly is going to serve the poor any better than a regulated commercial system would.
"Actually, poor people should not have been receiving the mortgages that the banks gave out and the primary reason they got them was due to lack of oversight by the government. We are, afterall, in the "subprime mortgage" mess."
I wasn't referring to sub-prime mortgages necessarily, we've been subsidizing mortgages to people who cant afford them on their own since the GI bill. Anyway, there wasn't anything wrong with the sub-prime mortgage system, which had been in place since the 1970's, until they started selling the mortgages as securities on a market (i.e. speculating with them). Which might still have worked out if gov't regulators had been doing their job (may the ghost of Alan Greenspan forever haunt the earth). But that has nothing to do with what we are debating here.
"Upon analysis of actual market behaviour, the vast majority of incentive-policies fail utterly." Really? How do you account for the growth of large agricultural corporations at the expense of small farms? For the widespread prevalence of corn-starch as a sweetener in food? For the rapid growth in health management organizations? Why have labor unions declined so rapidly in recent decades? Why is there so much construction invested in roads and highways and so little in rail? Why has ozone been virtually eliminated as a major pollutant but carbon has not? Why is gasoline so cheap? Ask yourself why all of these things I just listed only seem to occur in the United States? It's because they are all the direct effect of American federal policies on markets, and not of market forces acting independently of federal policy.
Note that I am not claiming that federal policies are always bad, there's lots of positive ones as well. I'm merely claiming that gov't incentives are effective, they can change markets in expected directions.
"My main issue with "incentivising" the private market with doing the things I describe is that private banks are only out for profit. If I give them a billion dollars to invest in various business, and you're concerned that a congressman might be trying to porkbarrel investment money, what would private bankers do who have zero impediments to immoral acts?"
They would try to make a profit. That's the reason why private markets are more efficient than governments except for those situations I mentioned above. Trying to make a profit means that the commercial sector will pay for itself (if possible), and not have to rely on some sort of external subsidy. If you want self-sustaining socially progressive economic activities, then you have to find some way to make them profitable to the people who provide the money.
@21: Of course the people who provide the loans would claim that the interest rate is due to the high default rate, and since this is a cycle based on continuous feedback I doubt anyone can really tell who is right. Eliminating payday loans sounds suspiciously like telling poor people we know what's best for them- they want these loans, maybe they should get to decide? As for neighborhood-based business start ups, it wont do any good to provide the loans unless you also protect the businesses from competition. Small businesses tend to suffer the same fate as small banks- they get swallowed up by chains. That wont prevent the loan from being repaid (guarantees it actually) but that sort of undoes the effect I think you are trying to achieve here. I think what you are really searching for is a way to make small business competitive in America, which is a different issue altogether from financial sector reform.
"If a guy's car breaks down, one of the most usual unexpected costs" This really isn't something that can be effectively dealt with using any form of loan. If someone cant afford the $400 it would take to buy another car, then they really can't afford any extra debt, no matter how favorable the terms. They need a grant, not a loan.
"The reason the big banks failed due to subprime loans was because they were taking on so many bad loans, very far in excess of their reserve capital to be able to soak the losses."
This was a contributing factor, but not the most important one. The big banks failed due to a combination of inaccurate risk assessment and the widespread practice of buying and selling credit default swaps to one another. I have written a short summary of the financial crisis here (it's a review of "All the Devils Are Here: The hidden history of the financial crisis" by Mclean and Nocera).
@23: "Well the general idea is that we hit banking markets that have been untouched by the private banking sector ever since the 50s. I'm trying to tackle what I see as a "gap" in the market due to low profit margins and profit-motive problems."
That's not a problem, but again, we don't need a special new bank to do this. The US gov't already has a program in place, it just needs more funding.
"This is all about precision use of government money in areas untouched by the private industry in order to maximise productivity across the board." Sure, like public transit, or social security. But that money is given away, not loaned.
See, the underlying problem I really have with your idea is that you have spun it in terms of a loan. That immediately placed it in the context of something that has to be paid back, with interest. But that isn't the best way to make the poor productive. We don't loan poor people the money to pay for emergency health services, we just provide it. Why not just dispense with the whole lending aspect of this and provide the residents of poor neighborhoods, or the employees of a factory, with development grants instead? Grants are inherently more efficient than loans because you can dispense with the overhead costs of collecting the money back. And the recipients get even more value from the money, since they don't have to plan on paying it back. It's really better for everyone.
So I had an idea it goes like this:
We create a government bank, this exists like other private banks and alongside them, to provide basic banking services and is strictly separated from the central bank. It has no power to issue currency and is not given any special preference. That is, its shares are 100% owned by the government and has certain internal regulations blocking it from making risky investments (because it would be embarrassing to have to bail out a government bank versus a private bank).
Now comes the more interesting part. Aside from low fees, micro-loans, no minimum balance, widely available branches and operating in low-income neighbourhoods as a low-value bank, it can perform government policy direct investments.
Here's what I'm thinking, if you have a business proposal, you take it up at the gov-bank and they may offer you the services of a "government venture capitalist".
The primary purpose of the venture capitalism is to allow a way for a group of workers, who would otherwise be unable to create their own high-sunk-cost facility to provide their labour (a solar panel factory might cost a billion dollars, which 200 blue collar workers could never scrounge up) are now able to do so. They build a factory with this investment money and if they are successful, now get to enjoy the full fruits of their labour without having to resort to working for low wages elsewhere. This would promote higher wages in all industrial sectors.
If you accept the buttload of money (assuming you pass the sniff test) then you have certain restrictions.
The "taxation" is based on the concept that you don't make your full value add to a corporation because the corporation pays for the tools you need to produce your labour. However, as we all know, most corporations "overtax" you, whereas with the arrangement I've created, if it cost the government 1 billion dollars to make the factory, you pay back in your "taxes" exactly 1 billion dollars.