My answer is simple, sell them. Close 'em. Burn 'em to the ground.
You may have gathered that I'm not a fan of State Owned Banks (SOBs). This newspaper is also worried about them, thinking that we need to do something: “The default loan epidemic is a glaring symptom of this malaise. Year after year, powerful individuals, often well-connected, exploit the system, securing loans without adequate collateral or repayment plans.” The thing we all need to understand is that this is not a mistake of such a system, it is the purpose of such a system. Further, the loss, the amount that we as a society lose out by, is not the amount lost to such activities, it is vastly greater than that -- the effort made by others to dip their ladle in that same gravy.
Let us go back here. We desire to have an efficient banking system. One that moves our savings into profitable investments which then develop the economy. A developing economy makes us all richer. We also get richer by the returns to our money that has been invested; if it's investment banking, then from the rise in the value of the investments; if it's commercial banking, then the interest paid on those profitable loans.
It's a delightful and virtuous circle. We save, the bank invests it, we get money back ourselves and the economy grows -- so, we do more of that, the economy grows some more and we do more and we enter that spiral up from a less developed nation to developing and, in only a generation or two, to developed. Along with that nice side effect that our children get to live those excellent lives we have only dreamed of.
We also know that markets allocate resources better than any other system. Our proof is very simple -- those places which have used markets to allocate resources for a century or two are rich. Those that have not are not. Those that have recently turned to doing so are getting richer, those that regress are getting poorer.
So, now we think about that state allocation of capital. Or, here, state banks which are much the same thing. If they allocate capital as well as the market then we don't need them, as the market will allocate in their absence. If they allocate worse than the market then we don't want them, for that misallocation makes us individually poorer and also the society poorer as a whole. Why would we want to have a system that makes us each, and together, poorer?
How do we know that the political allocation of investment funds makes us poorer? Well, think of the complaints we've got about the politically connected being able to get cheap loans at low interest rates that they don't then pay back. The SOBs are lending money inefficiently, to those who either won't or can't pay it back.
This then leads to this newspaper's desire to reform those banks, so that politics doesn't influence the lending decisions. But that's not how the system works and never will be. The entire point of having state banking -- and this would be true of state investment funds as well -- is so that politics, not economics or even good business sense, influences who gets the money. Which leads to what we're seeing, that those who shouldn't get the money, but do have political influence, get it.
But it's even worse than that. In order to gain access to those low-priced funds the potential borrower has to suck up to the banking bureaucracy. By definition there will be failures here. The cheaper the funds -- the less they have to be repaid -- the greater will be the effort made to gain access to the free money. That effort is pure waste. It's not just the amount that is lost on the bad loans, it's all the soft soaping by everyone who doesn't get the freebie which is a pure societal loss.
From the point of view of those running the state banking system this is the point. All that unsuccessful sucking up is lovely to experience. Who would want to give up a system that removed all of those desperate supplicants?
Such a system isn't reformable into something that doesn't have that systemic loss. The answer therefore is not to have the system. Can we all agree that we should be leading the SOBs to the societal abattoir?
Who knows, maybe we can use the market system to decide how that flesh tastes best -- as we should be using the market to allocate capital in the first place.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.