Balneus

Australian Lefty on Politics, Governance, Science and Info Management

Nationalized banks = lower interest rates

Posted by Dave Bath on 2008-07-29


A good exploration of pros and cons of nationalizing banks is covered in a recent Harvard Business School article (Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality? – 2008-07-22), based on actual outcomes in India since 1980 when a push for bank nationalization started.

Credit markets with nationalized banks experienced faster credit growth during a period of financial repression.  Nationalization led to lower interest rates and lower quality intermediation, and may have slowed employment gains in trade and services.

Voters love the idea of lower interest rates (almost everybody thinks this a good thing, unless it goes too far and credit is too easy).  As tough financial times aren’t going away anytime soon, nationalization becomes more appealing.

However, employment gains in the service industry, viewed as a good thing by many, can also be a bad thing, if resources shift from production to middle-men.

This also raises the question of the US government demanding equity and/or board membership equivalent to that a "white knight" would get when bailing a company out.  Why is unreasonable for someone who puts in 10% of capitalization (after capitalization of a company falls) to demand 10% of shares?

Mind you, as much of the credit to consumers is for housing, simply increasing "nationalized housing" for many citizens might be a good option, cut out the middle-man, and make it easier for people to move with geographical changes in employment opportunities.

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2 Responses to “Nationalized banks = lower interest rates”

  1. […] "Nationalized banks = Lower interest rates" (2008-07-29) reviews Harvard Business School research […]

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