“Politicians Want to Start a Bank. What Could Go Wrong?” is the title of my new Wall Street Journal op-ed about New Jersey Gov. Phil Murphy’s very bad idea.
The article will be paywalled for many, but you can read some of the journalistic coverage of the bank issue: Matt Friedman, Politico, Samantha Marcus/NJ Advance Media. Some articles I cite in my piece along with relevant links/research: The Economist on German Landesbanken, Aaron Fernando, The Progressive (citing German example, and noting current campaigns for city-owned banks in Los Angeles, San Francisco, Seattle, and other cities); Erica Jedynak letter, MyCentralJersey.com (“A 2011 report based on research provided by Federal Reserve Bank of Boston and other state agencies recommended the Massachusetts legislature not pursue the idea”).
More: Joseph Lawler, Washington Examiner:
Research on public-owned banks across the world suggests [that lending is politicized]. A 2002 paper from a Northwestern University economist found that areas with stronger political parties get lower interest rates from public banks. Political interference is likely the reason that public banks have been found to underperform compared to private banks in underdeveloped countries, according to a 2012 paper written by Taiwanese researchers.
On corruption rankings, Transparency.org on Germany; Five Thirty-Eight and Harvard Safra Ethics Center on U.S. states. On New Jersey’s outstandingly bad record for corruption: Olivia Nuzzi, Daily Beast and Philip Bump, Washington Post.
8 Comments
I know nothing about New Jersey, except that it is a shining beacon of clean politics and that its politicians all wear white clothing to symbolise the extreme degree to which they abhor corruption.
But I do know about Carinthia, a small state in the similarly small Republic of Austria. Carinthia had (in 2015) about 560’000 inhabitants and a GDP of € ~18 billion (I use “billion” with the US-American meaning of the term, that is, 1 bn = 1’000’000’000).
The small clique of people who ran the country knew how to please their friends. In the ten years up to 2006, the state bank Hypo-Alpe-Adria undertook to guarantee every and any dubious “investment” in the Balkans that the politicians’ friends could come up with. …Oh, and all those mortgages backing all those hotels in Eastern Europe? They were denominated in Swiss Francs. So when the Swiss Franc went from 1.7:1 tonear-parity with the Euro, the jig was most emphatically up.
The truly astonishing part is this: Carinthia’s GDP at the height of all this was, see above, € ~18 bn. In 2006, the guarantees undertaken by H-A-A amounted to € ~24.7 bn, a third again more than the entire state’s annual economic output!
And if that is not bad enough: The entire annual budget of the state of Carinthia, whose politicians have caused the politics-controlled state bank to guarantee € ~24.7 bn, oscillated between € 2.1 bn and € 2.4 bn (2000–2008).
“If something cannot go on forever, it will stop,” as Herbert Stein said. Well, it didn’t. The federal government dug deep into taxpayers’ pockets and spent € ~15.7 bn to make good the losses (€ ~8 bn were covered by the fire-sale of everything not nailed down). Those € ~15.7 bn came out to 8% or so of Austria’s annual national budget, perhaps not quite what one has in mind when thinking of pocket change.
Oh, and in 2005, only three years earlier, a different state bank already went down the drain, helped by a large flush of taxpayer money. Yes, politicians forced the bank into bad lending, helped along by managers who loved the thought of futzing around with nary a chance of ever being held to account.
So who would think that creating a state bank might be a bad idea? …The taxpayers are going to hate it … but nobody cares about that.
The argument that New York is especially corrupt seems based on all the work that the U.S. Attorneys offices for the NYC area (SDNY and EDNY) do. Just possibly motivated by the eagerness of reporters from the Times, the Journal, and other New York papers to serve effectively as press agents for politically ambitious U.S. Attorneys.? I’m not claiming that New York is the land of clean hands, but I’m skeptical that the data collected here has any meaning.
The discussion in the piece is of New Jersey. Is New York corruption relevant?
Oops, Walter, I meant to respond to the previous post that included the FiveThirtyEight ranking of state corruption. Since I am on this one instead, I should add that out here in San Francisco, the idea of a city owned bank pops up from time to time here as well. It would be just as disastrous here, but more from the effect of a bank run by progressive ideology rather than outright Jersey style corruption.
How can a city or state-owned public bank lose? When their loan and investment strategies crap out, they can just force the taxpayers at gunpoint to backfill them.
I disagree with nothing in the comments. I do have a question, however: are governments more inherently corrupt than private corporations? Stated another way, do we expect unregulated private banks to operate better than state banks? If so, why?
“Stated another way, do we expect unregulated private banks to operate better than state banks? If so, why?”
First, no unregulated private banks exist. Banking is one of the more heavily regulated businesses.
Second: Yes. Why? Because if they don’t operate better, they go out of business and the owners/investors lose all of their money. A truly unregulated bank could not expect to be bailed out by the government if it was failing.
I would note that a bank owned by stockholders or even a family is answerable to those people who own stock (or the institution itself), whereas a government owned bank is answerable to…who? While non-government institutions are under government observation, many government entities are able to avoid this same scrutiny…
I understand that technically the government is answerable to the taxpayers/voters, in reality they often go out of their way to ensure the public has no idea what’s going on…