Should the Government Intervene in Those Banks it Owns?
I don't try and write much about stuff like this any more. There are plenty of opinionated blogs out there that do enough opinion economic analyses and wading into these areas has all the fun of stepping into a minefield. But sometimes I do think about these questions and, if I can think of a really simple objective answer to one single question, then maybe I'll share it, on the basis that the intellectual fun cancels out the pain of professing an opinion.
This question is intellectually fun because it does have a simple, logical answer. When the UK banks went to the government, the government tried to make pumping in money fair by punishing the shareholders. As a result, if you owned shares in a bank that was bailed out, you would have seen your stake reduced to next to zero and lost a lot of money. The message I assume that's contained in that kind of action is that it was the shareholders duty to keep the banks honest and to stop them taking risks and their responsibility to see that it does not happen again, not the CEOs of the bank.
With the government becoming a major shareholder in some banks, it therefore falls to the government as the majority shareholder to carry out these responsibilities (that it set itself) properly. Without the government acting, there can't be any oversight in those banks it own the majority of (unless the government solely limited itself to non-controlling shares, at which point it falls to the next biggest shareholder(s) to take action).
There is a strange paradox, therefore, in the perception that the government should not get involved in running banks because it is the government, as it stops the government fulfilling its responsibilities as a shareholder (set out by itself), whereas private banks with shareholders can. In other words, the government is supposed to behave less responsibly than the private sector because it is the government.
Normally, the government shouldn't intervene in free market institutions (like banks) because it will behave less efficiently (according to free market theory). However, in this case, now the government is involved, by being required to not get involved it is being forced to act less efficiently than private institutions. This is a self-fulfilling prophecy.
This question is intellectually fun because it does have a simple, logical answer. When the UK banks went to the government, the government tried to make pumping in money fair by punishing the shareholders. As a result, if you owned shares in a bank that was bailed out, you would have seen your stake reduced to next to zero and lost a lot of money. The message I assume that's contained in that kind of action is that it was the shareholders duty to keep the banks honest and to stop them taking risks and their responsibility to see that it does not happen again, not the CEOs of the bank.
With the government becoming a major shareholder in some banks, it therefore falls to the government as the majority shareholder to carry out these responsibilities (that it set itself) properly. Without the government acting, there can't be any oversight in those banks it own the majority of (unless the government solely limited itself to non-controlling shares, at which point it falls to the next biggest shareholder(s) to take action).
There is a strange paradox, therefore, in the perception that the government should not get involved in running banks because it is the government, as it stops the government fulfilling its responsibilities as a shareholder (set out by itself), whereas private banks with shareholders can. In other words, the government is supposed to behave less responsibly than the private sector because it is the government.
Normally, the government shouldn't intervene in free market institutions (like banks) because it will behave less efficiently (according to free market theory). However, in this case, now the government is involved, by being required to not get involved it is being forced to act less efficiently than private institutions. This is a self-fulfilling prophecy.