Thursday, October 09, 2008

Government Ownership of Banks

I see that the federal government is now considering taking equity positions in banks.

This is not as crazy or unprecedented as it may sound.

The federal government owned shares in both the first Bank of the United States (1791-1811) and the second Bank of the United States (1816-1836). There is a nice article about this in the William and Mary Quarterly by Carl Lane.

Early state governments owned considerable amounts of state bank stock, some of which it purchased and some of which it received as a sort of tax or quid pro quo for granting an act of incorporation.

The benefit of stock ownership was that it provided the government with a nice revenue stream.

The cost of stock ownership was the conflict of interest it created. Pennsylvania and New York, for example, were stingy with new bank charters because they did not want to hurt the value of their stock portfolio or decrease their dividends by allowing competitors to enter. That, of course, hurt both depositors and borrowers.

By the 1830s/40s, national and state governments began to divest their bank and other corporate stocks because of such conflicts of interest.

On net, therefore, I think it would be better simply to adopt my plan (see below), or similar ones recently proffered by Glenn Hubbard, Robert Shiller, or Martin Feldstein. (McCain's plan is too vague to evaluate but note its similarities to mine.)

Another thing we might think of doing is walling off safe institutions -- those with minimal exposure to derivatives -- behind very strong government guarantees and letting the rest crash and burn. The billions could then be spent on unemployment and re-education benefits and we could end this nasty moral hazard problem once and for all.


Anonymous said...

Dear Professor,

Your synopsis of the current crisis during the Fox News special was very good. I was hoping to find the same lecture that you had expressed posted somewhere online. Would you consider - as a public service - either doing so or emailing me a copy?

In any event, I enjoyed reading your blog and plan to link to it as events progress.

Best regards,

Robert E. Wright said...


It is up on the web, here:

Bob W.