"Prices"- well, I was speaking in general, but yes, in this case that would be the government setting the interest rate for a loan to business venture. The problem is to assess how likely the loan is to be paid off (which amounts to asking how likely the new business is to succeed). It is generally acknowledged that a market is somewhat better at that assessment than an expert, but that both working together are better than either alone. But, of course, if the gov't has a monopoly on a type of loan, then there is no market to work with.
This is fundamentally different from what happens when a central bank sets the interest rate for the money it provides to the commercial banks. Because there is a market in that case- the international currency market. The value of the US dollar is set in the international exchange markets, and the Fed takes that into account when it sets the interest rate. So they are not operating in a vacuum.
"In the case of a government bank, we operate it by investing primarily in AAA/Tier 1 assets, such as equity, bonds and other high-confidence instruments in order to fund an expanding range of services design to operate specifically in lower income neighbourhoods."
It isn't clear to me where the money to do that is coming from. Is this bank investing the money from personal accounts? Then it must be paying out a competitive rate of interest to the account holders in order to attract the deposits. In order to have money to lend out , like any other bank, it will have to borrow it. If this gov't bank borrows the money to make loans from the same source that commercial banks do (from the central bank) then it's paying the same interest for that loan that other banks do, and in turn it will have to charge it's own loan recipients an interest rate to cover that and administrative costs. I don't see a lot of wriggle room here to offer advantageous terms to poor people, or other underserved populations. It's just another bank. True, it cant be bought out or lose share value (since it has no shares) and so isn't vulnerable to those kinds of market pressures, but I don't see how it can attract that many customers, either.
Bottom line, as far as I can see: If this bank doesn't have access to any funds that normal banks don't have, and it focuses on high-risk, low return loans to under-served populations, then eventually it's going to run out of money, because sooner or later it's going to run into a series of bad loans (every bank does- and this one is more likely to than others because it's focusing on a higher risk population). If the gov't isn't guaranteeing it against bankruptcy (using tax money) then how does this thing survive over time?
The fact that it doesn't have to maintain a profit margin in order to protect it's share value does give it an advantage, but you end up sacrificing what you referred to as "the initial injection of funds" (and any subsequent injection of funds it might need). I don't know how Canada is doing it, but if you are not using a gov't subsidy then the only other source of such funds are private investors. And they want to see a profit. And if you are using a tax-based subsidy, then, next point:
"If this outcompetes and destroys the private market, I don't care myself but a die-hard capitalist might decry the loss of the private market."
Don't forget the costs I pointed out in my earlier post. A tax-subsidized industry operates at a net loss with respect to the society that subsidizes it. That means it's basically leaching off of the rest of the economy. Maybe providing low interest loans to poor people is worth the extra cost, but then I suggest just cutting out all the lending aspects and just make the money a grant.
"I don't think that the ultimate effects were the original intention of the market incentives that the government programs were meant to have and this is what I meant by "perverse outcomes". For instance, with respect to agricultural subsidies which were meant to bolster the income of farmers whose food production had become too cheap turned into a vehicle for agricultural megacorps to force small time farmers out of business through "factory farming". It's not what we intended with the market incentive."
Well, that depends on what you mean by "intent". No, it wasn't the stated goal of the policy to enrich Arthur Daniels Midland at the expense of Uncle Joe's 20 acres, but the Lobbyists and the Congresspeople who passed the bills knew exactly what they were doing. That's why ADL spent so much money getting the bills passed, and influencing the wording of the legislation. But the point is that if one want to achieve a certain effect on a market, there are experienced people who know how that is done.
"But, I'm totally open to private market incentives. I don't think that the government banking concept is mutually exclusive, but I'm more interested in what you think those specific incentives may be (and what YOUR particular goals might be)."
I think we have the same goal- a self-sustaining local economy based on resident-owned businesses. I just don't think a top-down federally controlled central loan bank is the answer. I would rather see locally owned private neighborhood banks instead. "Community Capitalism." To explain how we could get there isn't simple or easy, but it would be an interesting discussion...
"Aaaand additionally, the nanny-state argument has no value to me. If a government is trying to protect the poor from predatory interest rates, that is a noble goal to me. The poor don't exactly have the time or resources to figure out how interest rates and whatnot works. They need to pay rent the next month or put food on the table. I can see that Libertarians may disagree, but I have nothing against a government trying to protect me."
No argument there, except that, again, someone has to pay for it, and this source of funding has to be stable in the long run, and ideally not at the expense of the rest of the economy. That's why I keep insisting on self-sustaining systems whenever possible.
"Established business people would rather go with low-sunk-cost and outsource labour to India/China rather than build expensive automated factories in America and employ people at 40-60k/year. This investment service allows the middle class to combat this behaviour by opening up the expensive automated factories and compete with outsource labour by being productive enough to justify the cost of the factory."
The problem is that there is no reason to think that such a scheme would in fact be competitive with Chinese and Indian companies (except for the fact that such companies are more focused on their own domestic markets right now, but that cant last). Also I find it kind of funny that you're in favor of automation, since that's responsible for at least as many lay-offs as outsourcing. That's why Americans are better off not trying to compete on price. Nobody is in position to provide better customer service than a brick and morter local store.
You might find it interesting to know that I actually own and operate my own independent bookstore. I survive just fine on walk-by traffic who are attracted by the friendly and open atmosphere of my store. Amazon cant touch me. Meanwhile every other locally owned used bookstore around me is dying, because they wont innovate. Local can compete, it just has to be smart and different.
These walls of text make it impossible for anyone else to contribute to the discussion. Just throwing that out there.
Flying Dutchman
In the interests of fairness and honesty, I started out trying to read it all, but I get a headache from all of it and my eyes start to glaze over.
"Can ye fathom the ocean, dark and deep, where the mighty waves and the grandeur sweep?"
Okay I'll try to post small things then, and tackle just a single big point.
I think that you are making an underlying assumption that government agencies are always less efficient than market ones. I think that's only an accepted "fact" in America. Everywhere else it is not.
The two assumptions here are that "a government agency will operate at exactly the same as a private agency if it wants to maintain itself" and "a government agency that operates at less profit than a private one will be less stable". I think both of those assumptions "beg the question", in that you've assumed them but only have a personal logic train to go about proving it.
Firstly, almost every single Canadian crown corporation operates independently and receives 0 tax dollars and they are all profitable. Secondly, they work on maximizing benefit (and salaries), restrict high level salaries and are still in business and still make money. Thirdly, as you said, having sub-prime mortgages and other high-risk loans by themselves is not what caused the banks to fail, and my oversimiplified statement of the situation also applies to this; simply operating in low-income neighbourhoods does not by itself cause a bank to be unstable. Lastly, we bail out private banks constantly, so if you REALLY had to do it, you can bail out a government one, it's just worse PR (in an odd twist of psychology).
(I'll address your other points in other posts I suppose?)
EDIT: I just want to make sure that you know that I understand the high-risk nature of many of the micro-loans that the government services bank would embark upon. I'm trying to make it clear that they keep stability via proper investment strategies (eg. no securitising bad loans and selling that crap off and expanding their asset sheet like that). Also, charging no service fees or minimum balance is very doable, it's an impact of like 1% of revenue, and that alone will make banking there better even if the interest rate itself is no different (you'd grab up all the low-end bank accounts).
edited 9th Jun '12 1:05:53 PM by breadloaf
I would be happy to discuss any ideas of yours.
Yeah, I suppose my main thing is that I don't think that this requires tax dollars to subsidize the industry and would still be able to offer more competitive rates. In most cases of Canadian and European corporations, they are usually quite competitive on their own and don't require tax infusions. They are usually also more stable than private entities because they are forced to operate in a more safe manner. America doesn't even have any state corporations (that compete with private entities fairly) to speak of, so there's no examples I can use in the USA.
I think though, I'm most interested in what you think would be a good market incentive. All the ones you named had bad side effects, so I'm curious as to what you believe would work versus a government run bank.
Sorry for the long, long delay. Since I knew a proper response deserved a considerable amount of research, I wanted to take my time and do it right. Please consider my absence a sign of intellectual respect, not lack of interest.
I also apologize ahead of time for the wall of text, I'm sort of thinking this out as I type.
Now then, since I previously had zero knowledge concerning Canadian Crown Corporation, I have tried to correct that somewhat. It appears that the largest of them is the Post, which operates almost exactly similar to our United Postal Service, but these are perhaps not the best examples to use, since neither of them make a profit on their own (if the UPS wasn't a monopoly with respect to letters, it would quickly go bankrupt). So- poor models for a government-run for profit business.
Then there is the Canada Mortgage and Housing Corporation, which is the second largest, but all it seems to do is guarantee mortgages against default, exactly like the US FDIC. Insuring bank accounts is perfect for a government agency, since it's actually pretty low risk but requires a huge capital reserve, something the private sector cant provide. This CC does generate a surplus every year, but it also receives budget appropriations from the central government as well (2.6+ Billion in 2009-2010)
(scroll down to "Exhibit 5 - Text Description"). So perhaps this also is not the best model for your purposes.
In fact, I am unable to identify a Canadian Crown Corporation that does generate a surplus but does not receive government appropriations. My research was not exhaustive, however, so maybe you can identify one for me.
Now, the US has something much more in line with what you had in mind- they are called "Fanny Mae" and "Freddy Mac", short for the "Federal National Mortgage Association" and the "Federal Loan Mortgage Corporation". They buy mortgages from private mortgage originators (banks) so that they money they buy them with can be used to make more mortgages available to potential homeowners. They then sell these mortgages to investors on Wall Street. For obvious reasons, not really what you had in mind.
But now we come to the interesting part- because you were asking me about "market incentives". Government incentives are probably the most debated issue in economics, because they distort markets. Laissez Faire economists obviously don't like them- more progressive ones do. The "Law of Unintended Consequences" is very much in operation here.
I'm adopting a middle position, because I want to argue that incentives provided by the gov't to private for-profit corporations are one thing, but incentives created by a government-sponsored for-profit enterprise is something else: much more intrusive and much more dangerous.
The recent history of the financial crisis bears me out- Fanny Mae and Freddy Mac both played key roles in causing the crisis. The "TL/DR" version is that because they competed directly with the private sector for business (buying and selling mortgages), pressure from that competition eventually drove them to either lower their lending standards, or run out of money. Since running out of money would have prevented them from fulfilling their mandated mission of encouraging homeownership, they lowered their standards, and began selling bad loans to Wall Street investors, with the consequences we are all familiar with.
I contend that if the gov't had simply provided the private mortgage originators grants for the purpose of lending to under-privileged potential homeowners who meet a certain standard, then the sub-prime crisis would never have happened. No competition, no conflicted missions, no pressure to lower standards, no need to get the money back, and less opportunity for Wall Street to speculate with bad mortgages. It would have been less distorting and safer.
Now your plan doesn't have a bank that buys and sells mortgages, it provides business loans itself directly to the prospective business owners, and then rather than selling the loans, it keeps them on it's own books.
So- it all comes down to this: in the event that private banks successfully compete with your gov't one, will you let it fail? If so- I'm on board. That wont distort the market too much. If not, then I cant endorse it.
I was more concerned you lost interest :)
With respect to crown corporations, as a whole a lot of their operations falls squarely into public interest, I was more referring to the business aspects. Fanny Mae and Freddie Mac don't really operate at all like CMHC, so it's probably not good to compare the two but you already said as much. Now, I would say that the vast majority of CMHC is public interest serving, but they actually have a loan business on the side where they make their profit. The money they receive from the government are earmarked for specific projects (usually cheap housing). CMHC is pretty large and I was more referring to the business aspects of it.
Canada Post has a monopoly on delivering letters, but outside of this they do not possess a guaranteed monopoly. This has to do with shipping packages and so on. Now, a lot of Canadians contend (without proof) that if Canada Post dropped the business, somehow prices and competition would be better. I for one think that, not only does that not make logical sense, there's no empirical evidence to back that. I should think that the government creates a service/price floor. So, while the budget for Canada Post is confusing, if their mail services outside of delivering letters fails, it's allowed to fail.
The banking enterprise would be run similarly. A large proportion of its operations are public interest service, but not all of it. There will be components that are purely business related and competing with private corporations. I would say that, the expectation is that the crown corporation does everything in its power to stay relevant in the market, but it won't be a gov-backed guarantee. If the business fails, so be it. But, I personally doubt it would (at least to the point where it disappears).
My intention, in most cases, with crown corporations, is to create a service floor.
EDIT:
Actually I think that the different history of government institutions in Canada and United States was their "goal". I find that the US agencies were attempting to just outright displace private entities or attempting to provide incentives for private entities to act a certain way.
Canadian institutions are to guarantee service levels. Fedex or UPS isn't going to ship mail to Northern Canada for 57 cents a letter. They'll charge you a heck of a lot of money. But they'll charge you far less if you ship letters to somewhere easy, like Toronto or Ottawa. In essence, we use tax dollars to keep the costs down. But, we didn't have Canada Post have similar backing with package-shipping. You can see that they just have to compete naturally against other shipping companies. However, you can also see, they don't really fail outright or, well, at all. They're a fairly decent choice if you want to ship stuff.
Now, people go, well hey Fedex/UPS/whatever costs less and provides better service. Therefore the government service is a waste of money. Except, that's a hard argument to make. We tried the same thing in the cell phone provider and internet provider industry, prices immediately skyrocketed by several hundred percent. We're basically one of the only western countries with internet bandwidth caps. (There's more to this problem than just privatisation of course)
So the thing is, if you sucked more than or cost more than Canada Post, you immediately went out of business. Because what the heck, I'd rather go with Canada Post. But, if you don't, then you're worth it. So basically, if private industry strangled Canada Post to death, the government service levels would drop. But then, if private industry then tried to monopoly price people, they would be immediately worse than Canada Post and government service levels would rise, thereby preventing it. (Note how you can scale down the service level of a government agency, thereby not have to blow tax dollars on keeping a dead business alive, this hopefully addresses your largest concern)
edited 15th Jun '12 5:21:02 PM by breadloaf
What you're essentially arguing is that government subsidized competition has positive effects on the consumer, which is true, if you do it right. But remember that those subsidies (I'm including indirect subsidies, like the Post having a monopoly on letter delivery which helps them stay in the package delivery business) still have to be paid for, so it's ultimately being done at the expense of the tax payers. An economy can carry some subsidized services, but not too many. It's a risky policy.
Well, with something like the post office, it's about economies of scale versus the costs of bureaucracy, and also about infrastructure. In the post office's case, the "infrastructure" is just the ability of Amazon to give super saver shipping-while the net revenue the PO gets in may not really cover its costs, meaning that the rest has to be taxpayer funded, I would argue that the lubrication to the country that dirt cheap shipping provides is more than worth the expense.
Would the same apply to Government banking? That is, the availability of capital that is distinct from an entity's profit margin, causes the firm to operate at a loss andd therefore require taxpayer expenditures-is the infrastructural improvement of this system worth more than the tax costs?
Well, I guess I don't find it as risky because even if say it were supported by tax payer dollars, which is an argument that the business operates at a loss, it's a loss margin that is kept to a minimum... which isn't as expensive as paying for the whole operation wholly through taxes. So, I think the economy can handle quite a lot of subsidized services or government controlled infrastructure because ultimately what makes capitalism work is competition and without government there to provide the marketplace in which businesses can compete, capitalism is nothing but a word we say and nothing of it happens in reality.
HEY EVERYBODY LET'S TALK MORAL HAZARD.
I'm a gambler. I have a 1,000,000 debt outstanding with the Yakuza. I'm in the middle of a high stakes game of Mah Jong, and if I don't leave with at least 1,000,000 yen, I'm dead-DEAD! So, yeah. Going for this Tsumo is crazy, I have a one in a million shot of getting the right tile. So yeah, on this gamble, my average earnings are in the red-deep in the red. Because it doesn't matter; -10,000 and -1,000,000 are all the same to me.
Banks work the same way-if they get sufficiently deep in the red, they have an incentive to engage in high risk activities that have the very small potential for a lucrative payoff, even if the net expected payoff is negative. Because really, it's not negative versus negative, it's "Chance of dissolution" versus "chance of not dissolution." But here's the thing-in economics, people are supposed to be held accountable for their actions. So when a firm is dissolved because it has debt, and that debt doesn't carry over to the actors, that's Moral Hazard.
I guess what I'm trying to say here is, having a centralized banking entity that had no chance of ever being dissolved-because that's just not an option-avoids the crazy Mah Jong scenario.
So are you saying that banks backed by a central bank won't normally engage in super risky behaviour to get itself out of a bad situation?
V
![[up]](https://static.tvtropes.org/pmwiki/pub/smiles/arrow_up.png "[up]"){kind=icon}
I can see Government-owned banks trying super-risky behavior, if it got them out of a difficult situation — if they fail, then they've lost their jobs, if they succeed...
Keep Rolling On
Well as legislation/regulation would limit a private bank from risky behaviour, I would expect a government bank to be under more strict regulations.
V
True. Even Government-owned banks here have got in trouble for Executive Pay*
Keep Rolling On
Well, banks won't specifically be in an all or nothing situation if such situations can't arise. That doesn't necessarily mean they won't engage in risky behavior, obviously-just that that one particular incentive won't exist.
No one is worried about risky behavior on the part of a gov't entity- no incentive. What everyone is worried about is the opposite problem- poor quality of services, low profitability and little innovation because the gov't has no reason to take risks. Also, it's a drag on the rest of the economy- so although underserved customers come out well, everyone else pays a price.
IS it a drag on the rest of the economy? As I described earlier, the zero profit scenarios of things like the post office create an infrastructure that helps lubricate the wheels of business. I can imagine having a powerful central banking agency like described here could actually have positive effects on the economy that outweigh any inefficiencies.
Lost in Space
I don't think that inefficiency is an automatically necessary result of a government-run enterprise. If you force it to operate on a profitability basis like the U.S. Postal Service, and allow competing entities in the market (USPS competes for package business with UPS and FedEx), it has plenty of incentives to be both efficient and competitive.
The USPS's problems are not in any way its own fault. It's the fault of Congress for forcing impossible financial rules on it, and more generally the fault of society for turning away from snail mail as the preferred means of personal communication.
"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"
Hey man, that's how market economies work. When one's prominent source of revenue is no longer feasible, you go out of business. The problem with the Post Office is that, the REAL value of the post office is that BECAUSE of all those letters they were delivering, they were able to deliver PACKAGES for dirt cheap.
And that's the lubrication I'm talking about. I don't care if we have to occasionally bail out the post office-it's a good example of something that gives greater returns to society than what is put in.
I think the USPS is also way more subsidized than is Canada Post but, hard to say. I know that Canada Post scales service levels based on how well it is doing. Usually there's a post office in every plaza (in some places it operates within local hardware stores and in others, it operates within pharmacies), but if nobody uses them, then they decrease the number of locations in an area.
So you don't just have a growing negative operating margin if the business is straight up unprofitable.
And like Tomu said, there's the infrastructure question. You don't question the "subsidizing" of roads because you know there's a huge positive business effect. The price you pay for the central banking service might be made up for in substantially cheaper banking prices, so the total money you are losing might actually be less.
It's sort of like the healthcare argument, where people assumed healthcare would be cheaper if there was competition, and that new medical procedures only arise in the private market. After fifty years of experimenting with universal healthcare in many different ways across many different countries, we've come to learn those "truths" were wrong.
edited 18th Jun '12 11:19:00 AM by breadloaf
Lost in Space
USPS has never been subsidized by the government that I know of. It does get very favorable loan terms, but right now it's very close to being unable to remain solvent even with borrowing. The entire reason for this is that Congress passed rules forcing it to fund its pension obligations in advance out to some ridiculous date, a rule that no other GSE has to follow. Basically they forced it to incur several billion in completely worthless costs.
edited 18th Jun '12 11:26:29 AM by Fighteer
"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"
That makes much more sense to me then. I don't really see how it's possible for it to run so poorly that it could be unprofitale to that scale.
In all cases of "unprofitable" government operations, it has been that conservatives attacked it with punitive legislation to make it fail.
@ de marquis
That's what I feel like about those 100 page threads.
So by price, I guess you mean interest rates. (Correct me if I'm wrong because that would change the argument)
I presume that you are talking about how it is difficult for a government bank to assess the interest rate for a particular bank account, investment certificate (such as a guarantee investment certificate in Canada, or a... hm... I forget the name in the USA), or for loans? The situation as it stands today, (which you could turn the argument into saying that the current interest rate arrangement is highly flawed), is that the central bank is the central determiner of the interest rate via the key overnight interest rate. So I don't think it changes that much with a firewalled government bank operating on the other side of that interest rate.
I think that you may be reading too far into what I mean by "low fees"/"low interest rates". I don't mean business-breaking rates. It's entirely possible for a bank to operating charging nearly no fees because when you look at private banks, the fees they charge make up a fairly negligible amount of their revenue. Their primary source of income is from their investments.
In the case of a government bank, we operate it by investing primarily in AAA/Tier 1 assets, such as equity, bonds and other high-confidence instruments in order to fund an expanding range of services design to operate specifically in lower income neighbourhoods. Otherwise, in middle and upper class areas, it can operate normally. This doesn't need to be tax funded, at least not after the initial injection of funds (for Canada, preferably from the oil sands, for America, not sure where you might draw the funds from). In this case, a bank can easily operate safely, minus a profit margin, reduced and restricted executive salaries, and competitive low-end/middle management salaries. If this outcompetes and destroys the private market, I don't care myself but a die-hard capitalist might decry the loss of the private market.
The difference between this and communism is that with communism you had bureaucrats running the show. In this situation it is a crown/state corporation run like a business with the intention of having as low profit-margin as possible. Canadian banks for instance usually post 50 billion dollar quarterly profits. You reduce that even by 10%, and you get far cheaper service with no impact to the stability of the bank. Alternatively, profit can be used to fund the investment services.
I don't think that the ultimate effects were the original intention of the market incentives that the government programs were meant to have and this is what I meant by "perverse outcomes". For instance, with respect to agricultural subsidies which were meant to bolster the income of farmers whose food production had become too cheap turned into a vehicle for agricultural megacorps to force small time farmers out of business through "factory farming". It's not what we intended with the market incentive.
But, I'm totally open to private market incentives. I don't think that the government banking concept is mutually exclusive, but I'm more interested in what you think those specific incentives may be (and what YOUR particular goals might be).
I was thinking more about small businesses requiring small scale loans, a market which is typically not well served by large banks (anything below a $100 000 loan is usually very difficult to come by).
As for the poor requiring certain assistance, as you may know, I'm already a universal health-care guy, so the banking services are merely service on top of all sorts of other social service they'd be receiving (including grant money, which the bank could also do). I mean if data bears out that small scale loans don't help for those situations [in place of pay day loans] then sure, I'd be happy to switch the system into grant money instead to be more efficient in helping lower income families get out of a rutt.
Also I'm specifically attacking how the US government has been helping the poor. I think it's been entirely flawed. It does need more money, but I additionally think that the system is poorly designed in the first place.
Aaaand additionally, the nanny-state argument has no value to me. If a government is trying to protect the poor from predatory interest rates, that is a noble goal to me. The poor don't exactly have the time or resources to figure out how interest rates and whatnot works. They need to pay rent the next month or put food on the table. I can see that Libertarians may disagree, but I have nothing against a government trying to protect me.
For the large scale investments I think that a loan makes more sense. You can have it partially grant (no-interest is already fairly generous and is like a partial grant combined with the loan). But this tackles one of the major issues I think exists in the USA, and you could possibly disagree with this logic train but here goes:
Established business people would rather go with low-sunk-cost and outsource labour to India/China rather than build expensive automated factories in America and employ people at 40-60k/year. This investment service allows the middle class to combat this behaviour by opening up the expensive automated factories and compete with outsource labour by being productive enough to justify the cost of the factory. Additionally, I think it holds back technological innovation if we don't at least "flop" a few times building the new stuff.
edited 8th Jun '12 1:17:12 PM by breadloaf