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Government Banking and Investing
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Government Banking and Investing:

 51 De Marquis, Mon, 18th Jun '12 1:33:27 PM from Hell, USA Relationship Status: Buried in snow, waiting for spring
Who Am I?
The USPS ''is'' subsidized, just not with tax dollars: "...The USPS has not directly received taxpayer-dollars since the early 1980s with the minor exception of subsidies for costs associated with the disabled and overseas voters. However, it does receive tens to hundreds of millions per year in "implicit subsidies", such as breaks on property tax, vehicle registration, and sales tax, in addition to subsidized government loans.[6] Since the 2006 all-time peak mail volume [7], after which Congress passed the "Postal Accountability and Enhancement Act"[8], revenue dropped sharply due to recession-influenced [9] declining mail volume, [10], prompting the postal service to look to other sources of revenue while cutting costs to reduce its budget deficit.[11]"

Bottom line, no one uses snail mail anymore. If they were a for-profit, it would be time to diversify. They cant do that, because they're a gov't agency.

As for Tomu's point about infrastructure, that is in fact the reason it was established in the first place. The US mail is what made mail-order businesses possible. But that's my point, that infrastructure isn't the main way businesses interact with their customers anymore. The indirect subsidies are making less sense as time goes by.

But even if it did make sense, that doesnt really apply to banking services.
“Disobedience is the true foundation of liberty. The obedient must be slaves.”
 52 Fighteer, Mon, 18th Jun '12 1:42:13 PM from the Time Vortex Relationship Status: Dancing with Captain Jack Harkness
USPS also handles package shipping, just like FedEx and UPS. That's always needed, more so than ever given that people are buying lots of stuff online and having it delivered. Regardless, snail mail would not be possible without a GSE, as witnessed by the fact that its competitors don't even try to get into that business.

Let's not make this about USPS, though. It's simply an example of a GSE that can be competitive under the proper circumstances.
Neoclassicism, AKA the Tinkerbell school of economics.
 53 Greenmantle, Mon, 18th Jun '12 2:53:42 PM from Failing Britannia Relationship Status: [TOP SECRET]
... and?
How about Public Transport, since that can make a profit?*
"To strive, to seek, to find, and not to yield" — Alfred, Lord Tennyson
Well with respect to gov banking you have two different parts to it:

The services arm will probably have a very low profit margin but I really don't see how it can really engage in "risky" behaviour. It would just invest its holdings only in non-risky assets and additionally, hold a high proportion of "fractional reserve" (compared to other banks).

The investment arm may or may not be profitable but we could roll it in with R&D funding and that fun stuff. In that case, it's basically doing the same thing we used to do with grants except through a bank using investment experts; people who actually know what they are doing.

 55 De Marquis, Tue, 19th Jun '12 7:06:35 AM from Hell, USA Relationship Status: Buried in snow, waiting for spring
Who Am I?
Around the world, only a half dozen public transit systems actually pay for themselves, and all six of them are in Asia, in very high density urban areas.

However, some do argue that if gasoline weren't also subsidized, public transit would be much more cost effective.

Anyway- gov't subsidized banking services to under-serviced populations could work, provided you dont mind operating at a net loss and you are very careful to keep the gov't bank out of the for-profit banking services market.
“Disobedience is the true foundation of liberty. The obedient must be slaves.”
 56 Greenmantle, Tue, 19th Jun '12 7:27:03 AM from Failing Britannia Relationship Status: [TOP SECRET]
... and?
[up]

Around the world, only a half dozen public transit systems actually pay for themselves, and all six of them are in Asia, in very high density urban areas.

However, some do argue that if gasoline weren't also subsidized, public transit would be much more cost effective.

Actually, I wasn't thinking about that, I was thinking about bus companies as a whole — but even then, even State-owned operations like London Transport were cutting services in The Fifties due to lack of demand (and railway lines were closing too). Hell, it was whole point of the Beeching Axe — to make British Railways Profitable for the Government.

"To strive, to seek, to find, and not to yield" — Alfred, Lord Tennyson
I don't think you need to stay out of the for-profit banking services for non-poor. Like I said, you can scale service levels according to profit margins. If they're failing in the face of private banks and credit unions, then we scale it back. I'm concerned that if we artificially restrict the government banking system we're getting into one of those "the compromise is worse than not doing it at all" problems.

edited 19th Jun '12 11:29:13 AM by breadloaf

 58 Fighteer, Tue, 19th Jun '12 2:36:50 PM from the Time Vortex Relationship Status: Dancing with Captain Jack Harkness
@De Marquis, I'd say that the fact that public transportation doesn't pay for itself readily is a good reason to have it be a government enterprise.
Neoclassicism, AKA the Tinkerbell school of economics.
 59 Greenmantle, Tue, 19th Jun '12 3:06:28 PM from Failing Britannia Relationship Status: [TOP SECRET]
... and?
[up]

Even when it does, don't expect sky-high profit margins: operators like First* and Stagecoach* run on average in the UK with profit margins of 15-20%, at most. And don't worry about investment, it is happening with some operators*.

Rail? Well, from the British point of view it's heavily subsidised by the Government, but the Government is trying to lower their subsidy, which is leading to fare increases to fares which are already seen as too high — what doesn't help is that the British railway infrastructure is having trouble coping with high and increasing demand*, and there isn't enough Rolling Stock either...

And anyway, what doesn't stop a Government demanding a Profit from a state-owned enterprise?

edited 19th Jun '12 3:07:31 PM by Greenmantle

"To strive, to seek, to find, and not to yield" — Alfred, Lord Tennyson
 60 They Call Me Tomu, Tue, 19th Jun '12 3:56:40 PM Relationship Status: Wishfully thinking
Sureeeeendaaaa
20% return on investment is bad?

 61 De Marquis, Tue, 19th Jun '12 7:10:58 PM from Hell, USA Relationship Status: Buried in snow, waiting for spring
Who Am I?
@Fighteer- I agree, but I'm not sure that those reasons apply to banking services.
“Disobedience is the true foundation of liberty. The obedient must be slaves.”
 62 Fighteer, Tue, 19th Jun '12 8:00:59 PM from the Time Vortex Relationship Status: Dancing with Captain Jack Harkness
Yes, but there's no reason banking services can't be profitable, unlike public transportation.
Neoclassicism, AKA the Tinkerbell school of economics.
 63 Greenmantle, Tue, 19th Jun '12 11:31:57 PM from Failing Britannia Relationship Status: [TOP SECRET]
... and?
@ Tomu: It's reasonable, at best. It's not a few hundred %, at least...
"To strive, to seek, to find, and not to yield" — Alfred, Lord Tennyson
Well with banking services, most of the money earned is via their investments. Boring all triple A investments with a significant fractional reserve locked in Tier 1 assets such as equity, may not get you a very good return but it'll make the government bank safe. I'm not sure of a political incentive to increase profit margins at the gov bank since its mandate is to provide service, not to make a quick buck and none of the profit can fund the federal/provincial budget. There's always strict firewalls between a government and a crown corporation, one of those being money.

Of course you can always argue government screws it up in some ridiculous fashion but at the same time, it's not that different from the US government letting/causing the subprime mess. In the case of Canada, the CMHC risk management division specifically argued against joining the US in the subprime scheme, the Liberal government at the time listened and so we avoided the worse of the excesses. The subsequent conservative government led by Harper then attempted to jump right in, even though warning bells were going off everywhere and even continued to try to relax mortgage lending to this day but had to backtrack several times due to bureaucratic revolt and bad press.

edited 20th Jun '12 1:33:38 AM by breadloaf

 65 De Marquis, Wed, 20th Jun '12 9:35:19 AM from Hell, USA Relationship Status: Buried in snow, waiting for spring
Who Am I?
The problem is that you are expecting relatively safe investments to pay for some relatively risky ones. AAA securities are reasonably safe (although the 2008 crisis was triggered by AAA rated securities based on sub-prime loans) but it is very unlikely they will show a rate of return high enough to cover the losses on business loans to underserved populations. Actually, they could, as long as you make very few risky business loans, but that kind of defeats the purpose.

Your plan so far isn't a bad one- I think you could probably make a decent business plan out of it except for the one glaring weakness of not knowing where to get the capital to start it off with. Every possibility we covered, private investors to public taxes, has been rejected for one reason or another. So I think you have a potentially good idea but your expectations regarding financing may be a little unrealistic.

“Disobedience is the true foundation of liberty. The obedient must be slaves.”
 66 They Call Me Tomu, Wed, 20th Jun '12 9:48:30 AM Relationship Status: Wishfully thinking
Sureeeeendaaaa
In an efficient market the gains on risky loans cover the losses on those risky loans, because the interest rate on risky loans are inflated by the risk premium. But then, are we arguing that we want to artificially keep interest rates down on high risk ventures via government banking?

Well my blog isn't called politically untenable because these ideas pass the political sniff test.

Canada can use Albertan oil money and pour it into a bank, which then forms a giant fund (ala Norway style who has the largest fund in the world due to their oil money) and invest it via a government services bank, with a proportion used to finance the low-end small time risky loans.

I think for the interest rate I would be saying is that no matter what the government will set it up, it'll be better than anything the poor would have ever gotten at pay-day loans (as they charge several hundred percent). That's "artificially" low in the sense that I'm cutting profit from the loans division and instead making my money primarily off of the investments.

As for the United States, I'm a little unsure where you might gather that money, but you can always just start smaller and branch out. There's no reason to suggest that if we roll out this bank that we must provide the capability for everyone all at once to be able to access the bank. We can roll out branches as we go.

 68 De Marquis, Wed, 20th Jun '12 2:18:16 PM from Hell, USA Relationship Status: Buried in snow, waiting for spring
Who Am I?
@Tomu: "But then, are we arguing that we want to artificially keep interest rates down on high risk ventures via government banking?"

That's my understanding, yup.

@Bread: "Canada can use Albertan oil money and pour it into a bank..."

I'm not familiar with Albertan oil, is that a publically held reserve? If so, that means you are still investing public money, even if isn't in the form of taxes. Gov't's like to hold oil reserves, against the day something cuts off the supply.

"There's no reason to suggest that if we roll out this bank that we must provide the capability for everyone all at once to be able to access the bank."

Give free money to one voting district and not others? That dog wont hunt.
“Disobedience is the true foundation of liberty. The obedient must be slaves.”
 69 They Call Me Tomu, Wed, 20th Jun '12 2:24:44 PM Relationship Status: Wishfully thinking
Sureeeeendaaaa
Well, remember-the risk premium increases the interest rate of ventures. But this doesn't mean the net rate of return is negative-it just means it's negative compared to the required rate of return of investors.

A government banking institution can theoretically operate under a Real Rate of Return of 0%

edited 20th Jun '12 2:25:16 PM by TheyCallMeTomu

 70 De Marquis, Wed, 20th Jun '12 2:41:21 PM from Hell, USA Relationship Status: Buried in snow, waiting for spring
Who Am I?
Not if it's expected to generate it's own capital out of profits.
“Disobedience is the true foundation of liberty. The obedient must be slaves.”
 71 They Call Me Tomu, Wed, 20th Jun '12 3:13:00 PM Relationship Status: Wishfully thinking
Sureeeeendaaaa
Well you have to keep with inflation, and you need to at least be able to cover your operating costs, but that's, what, an average of 5% rate of return?

We're throwing the Albertan oil money away in tax reductions which is idiotic. I rather invest it in something. Considering that investing the huge stockpile of money is the best way to keep the rainy day fund around, I think that makes sense.

And well, as I said previously, the smart way of rolling out the bank services may not be the most politically tenable but I'm avoiding that aspect of the discussion for now.

Canadian banks make most of their money off investments rather than the loan/deposit rate spread, so while the government bank in question will grow more slowly that's not too bad. The Canadian Pension Plan itself grows at (see here: http://www.cppib.ca/Results/ ) a very appreciable rate and invests primarily in long term AAA assets. I would expect the government bank to invest the money in a similar manner and have a similar rate of return.

The investment side is easy because that's actually making tax payer money more productive in many different ways. And if we don't need to inject any tax payer money in any way, that's even better.

 73 De Marquis, Wed, 20th Jun '12 7:20:21 PM from Hell, USA Relationship Status: Buried in snow, waiting for spring
Who Am I?
Well, if we think of this as a pilot project, and focus all the money into one medium sized urban community so that we can really impact the economy- lets just assume 500K residents serviced by approx. 10K businesses, so an additional 1000 new businesses in poor neighborhoods per year would make a significant visible difference. At an ave. of $10K per new business that's only $10 mill a year, relatively modest by national banking standards. We can assume that the majority of these businesses will go bankrupt within 5 years (since most do), assume only 1 in 10 last that long, which is conservative but safe, we reach our target of 1000 permanent businesses in 10 years. So we need at least $100 mill in capital over 10 years from somewhere. After that, in theory, the bank becomes self-sustaining (if all your assumptions are correct).

Would your Alberta oil money cover that?
“Disobedience is the true foundation of liberty. The obedient must be slaves.”
 74 Radical Taoist, Wed, 20th Jun '12 7:51:10 PM from the #GUniverse
scratching at .8, just hopin'
So we need at least $100 mill in capital over 10 years from somewhere...Would your Alberta oil money cover that?
Depends on how much we charge for it and who pays for the cleanup. It very well could, and easily, but not the way we're managing it now.
The oil money could have been hundreds of billions of dollars, now, this is very politically incorrect in Canada but Alberta basically should pour the oil money into this any sort of investment rather than tax cuts. I'd go further on that topic but this isn't the topic.

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