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Central Banking or Nationalized Banks?

In the aftermath of the bubble burst in '08, Iceland took a radically different path than the United States after their financial crisis and nationalized the banks, threw some people responsible for the crash in jail and bailed out the homeowners instead of worrying about only bailing out the banks. And now they're coming back and their economy is growing again... http://goo.gl/QuKGA

When the banks in Norway declined in 1992, the government simply nationalized them (instead of bailing them out leaving the tax payer to pay the bill) which gave the banking business a breather and was ultimately beneficial for its citizens, because the banking business returned to more traditional banking values, though it only was for a short period of time.

So, in terms of public prosperity is there any merit left to keep the current central banking system, with many private banks and one central bank, instead of nationalized banks?

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  • Nov 9 2012: Such decision depends mainly on one simple thing,which is the capacity of the economy to expand(which is something measurable) and how much money will the citizens needs to create new business(which isn't something directly measurable) . Considering these 2 factors.these 2 alternatives(Central banks or Nationalized banks) can be more or less convenient . Examples where one of these options are,for now,better than the other one are:

    - For developing countries and BRIC(with the exception of China),where the demand of financial resources has been becoming huge(both for large scale investiments and for small scale investiments),it's actually more interesting to incentivate competition between banks,so money becomes cheaper to borrow to consumer . The case of China here is special,as,historicaly,its government has been much more power and responsability for economic growth than others countries(such power and responsability existed way before PC rose to Chinese power in 1947) .

    - For a country where most of its structure is already lifted,there isn't so much demand for financial resources . With that,Speculation becomes much more dangerous to economy,since it's often,the only method for raising tons of money,differently from a "Developing country" . This is,often,the case of plenty of Western European countries .

    Possibly,there are more factors that are as much important as the factors already mentioned(infra-structure and capital demand) . In any case,factors are the only thing that can tell which decision is better . And such factors are largely different,depending on which country you are . As I like to say: "Panaceia is Placebo" .
  • Nov 9 2012: wee need to rid our selves of the old cold war propaganda about capitalism or socialism,
    CHINA has now got a free market economy with a lot of capital, drew millions out of poverty through our free market whos the dady there then
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    Oct 31 2012: I think that governments should keep out of banking. What is the point of individuals being fiscally prudent & then our 'leaders' getting us into debt by messing about with the banks. The power of the banks has grown out of all proportion to their usefulness, mainly due to the casino mentality that can make massive profits one day, & massive losses the next.
    If a bank goes bust it should be given a decent burial, like any other business, instead of vegetating on life support, until the cycle repeats.
    The money that I have in the bank is being moved slowly over to a little savings & loan company. They put savers & borrowers together for the princely sum of 1% instead of the 11% or so taken by the banks. We get a good return, & small business gets finance at a more competitive rate. To me this is the way forward & means finance is targeted at where the businesses need it, & the casino's can carry on using someone else's money. The sooner the government turns off the life support the better. Tax is meant for schools & hospitals, not feeding a gambling habit.

    :-)
  • Nov 10 2012: John: Re public or private, it was formed in 1916 by, I believe, union or proto -union members, not the City, so, as you say, that would I guess make it "private", although are Electric Utility Coops private? Don't they have a State Charter , so as to be sort of inbetween?
  • Nov 10 2012: I think it would be ideal to have a fixed number of nationalized banks competing with each other, with no private banks allowed, periodically the weakest bank gets eliminated in favor of a new one to keep the competition going. This way all the profits of the banks flow to the citizens.
  • Nov 10 2012: the whole premise of private banks is detrimental to society. the more heavily indebted people are, the more banks profit, so they have incentive to keep people under a burden of debt.
    also such banks necessarily are not ideal for a country's citizens, since the bankers' large salaries and bonuses, plus shareholder dividends must all be paid for in higher interest rates, which means people have less money to spend on general consumption. in this way private banks really are a leech on the economy.
    making it simple is the best way to go. one national bank in each country, free from private interest or influence, running at cost for the benefit of the citizens. it's good that norway and iceland have started taking out the trash.
  • Nov 9 2012: the cold war is now over lets nationalise everything but keep free enterprise and the free market that way the people will be safer and more prosperous while the coorporations battle it out with eachother and only themselves to exploit
  • Nov 9 2012: nationalist banks but with the free market would benifit all
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    Nov 1 2012: On one hand, a system with only nationalized banks, apparently, is against the rule of free market. Thus,I think the the former view that a current central banking system with many private banks and central banks can exert more postive influence on financial systems.
    However, in reality, as many uncertain factors can play a role in the effect the system produce, this system with both private banks and central ones cannot reach the expectation that we put on it.
    On the other hand, one obivious and absolute one of those factors is corruption which is especially severe in India and China. Therefore, a system with a central bank can, at least, regulate better.
    • Nov 9 2012: most socialist today believe in the free market , look at china they marketed our ass off so no bull about nationalist not for the free market
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    Oct 31 2012: Dear Mats

    You are not considering the fact that countries have different levels of corruption.
    In many countries doing this (nationalizing the private banks) would simply mean that the government will be able to steal more from the population.

    Regards!

    JB
    • Oct 31 2012: I do realize that there is a risk of corruption, but aren't the government by the people, for the people?
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        Nov 1 2012: No doubt it should be, but in many cases it's not...
        • Nov 1 2012: I hear you. But that usually would be the case in dictatorships, right? I think for the Western world, we wouldn't tolerate that.
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        Nov 1 2012: Hi Mats

        We have some nice examples in Latin America "democracies"...

        Sadly

        JB
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        Nov 1 2012: Hi Mats,

        yes, than can be an explample of "abuse" of power from my perspective (not the only one).
        if you are the president you need to care for all the population, not just the half that voted for you.
        but thats another discussion :)

        Regards!

        JB
        • Nov 1 2012: How exactly is he abusing his power? Chavez has always fought for the working class and the poor and when he nationalized Venezuela's oil production, the wealth went directly to the people decreasing poverty. It's a reason why he has sat in office for over 12 years. The rich guys will always manage either way.
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        Nov 1 2012: Dear Mats:

        Whats your base for that assumption? Have you ever being to Venezuela? Know many people from that country? Checked on the few reliable numbers available?

        Regards!

        JB

        Ps even if what you say is true, 12 years in power doesn't seam very democratic to me... Do you know that they have had elections in Cuba for decades and Fidel always wins? He must be really popular, and Cuba democratic.
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          Nov 2 2012: Thank you Julian

          Mats a whiff of the coffee?
        • Nov 3 2012: Chavez was the first president in Venezuela to launch social programs to help and alleviate poor people, which has resulted in poverty rate dropping dramatically, raising the education levels and improving the health care system for the poor. This doesn't mean that the country doesn't have problems.

          I base my assumptions on that it could have been far worse for Venezuelans. I don't necessarily agree with every single policy in the country and some things are pretty bad like the media censorship (if that is true however), but the fact that he nationalized the oil production is a sign that he cares about his people.
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          Nov 3 2012: To answer my question, I will take that as a nope
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        Nov 7 2012: Dear Mats:

        I have being to Venezuela and have friends and acquaintances from that country.
        I have many anecdotes to support my view, but let’s talk facts.

        I don’t know it by a fact, but I could bet that previous governments in Venezuela also had social programs, as do most countries in the world, if not all (we can argue about result if you have the data).

        Poverty rate:
        In 2011 poverty was 27.4% of the population with the lowest 10% of population consuming 1.7% of goods.

        Some other facts:
        26% inflation rate
        Country reserves of ~29bi, vs debt of ~90bi
        Oil is 95% of exports and 40% of federal budget revenues
        0 immigrants by 1000 people
        Maternal mortality: 92 deaths/ 100,000 live births
        Infant mortality: 20 deaths/1000 live births
        3.7% of children under 5 are underweight

        I understand that you have a political position you want to defend, but I believe information is far more persuasive than opinion (even if that opinion is repeated many times).
        Do you have any data to support you view?

        Things can always be better or worse, do you have any data to support why you think the current government was a good solution?

        Do you know where the money generated by oil production goes?

        Please answer with information supporting your reasoning.

        Regards!

        JB

        PS on a more personal note, I think you base your assumptions and political views on your life experience from Norway, so you extrapolate and believe it is somewhat similarly in other countries, except for the existence of bad and greedy people that abuse the population. Reality is more complicated and rhetoric and facts are not equal, and people are not always educated, corruption and violence are everyday facts in many countries, etc. I’m not saying that your view has no value, I just think you are not clear on your bias.
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    Oct 31 2012: i would suggest to frame the question in a different way. as it is now, and often, framed is whether we want the government to fix or manage the banking sector (education, healthcare, etc) to better serve the people.

    but one must understand that this fixing or managing consists of banning voluntary interactions between individuals. every time the state comes in to establish something like the FDIC, or prescribe certain types of contracts, or downright socializes banks, it means that some voluntary interactions will be banned. there will be a person and a bank that want to engage in some cooperation that would be beneficial to both, but they can not.

    it is not theoretical. the banking sector is so heavily regulated, it almost does not matter if we nationalize all. it makes little difference. but it is not good. it means that the banking sector can not work as people demand it. and since it does not function, the government, of course, proposes more interventions to fix it.
    • Oct 31 2012: "but one must understand that this fixing or managing consists of banning voluntary interactions between individuals."

      So? The law gave them the right to incorporate (otherwise shareholders would have their homes impounded whenever a company they invested in goes bankrupt) and a legal system to battle out their differences and the law can take some of those rights away.
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        Oct 31 2012: and how do you plan to fix one silly law with another silly law?

        in my world, companies would not have special privileges granted by law. only people can have rights, property or responsibility.
    • Nov 1 2012: "the banking sector is so heavily regulated, it almost does not matter if we nationalize all. it makes little difference. but it is not good. it means that the banking sector can not work as people demand it. and since it does not function, the government, of course, proposes more interventions to fix it."

      But that scenario contradicts what happened in Norway, right? The nationalization was that which created the turning point for the Norwegian market, where the banking business got a breather and went to more traditional banking values focusing on what banks should be doing; deposits and loans, not push structured products and investment in dubious real estate projects on widows and orphans, which was the reason the banks declined in the first place.
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        Nov 1 2012: at least you claim so. but of course you don't know what would have happened if the banking sector would have been truly free.

        in a free market setting, investment banks have to invest, otherwise where their money is coming from? but in a free market setting, there is not even need for investment banks, the economy does fine without them as well. only in a state-controlled environment it is possible that banks soak up capital, and channel them into non-productive uses.
    • Nov 1 2012: krisztian: I almost think you are not talking about the US, but some other country . You believe the Banks are "Heavily Regulated"?!~ Please. The main regulation is by the inaptly named "Federal Reserve", a Private Cartel of Bankers, who run not only our banking system, but apparently our government as well, since, although the taxpayers are expected to foot the bill for their various mistakes, but are not allowed even an audit of how they spend the money. The Fed is nothing but a scam for to cover for, and benefit , bankers. Just like President Andrew Jackson said, so long ago.l If you want some more information about this, just see some of Congressman Paul's videos . And I have news for you, whatever they had been doing up to the repeal of the Glass-Steagal Act,, the big Banks have more or less abandoned traditional banking, since their new swindles , like Derivatives, are much more lucrative (for them).,
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        Nov 1 2012: that "private cartel" is run buy a guy appointed by the state. and in addition to the fed, there are hundreds of regulations and interventions in the financial sector. start with the fdic, fannie and freddie, housing programs, regulated reserve ratio, fiat money, to the direct regulations you need to meet if you want to create a bank, plus all the laws regulating every industry, like the employer protection laws and customer protection laws.

        somewhere in the 19th century, some law (the content of which i don't remember) was made for any banks having at least six clients. my point being, there were banks with less than six clients. local banks for a small town of a few hundred inhabitants. can you imagine in today's environment that you decide to found a bank, you buy a safe, and start to put stickers around the city to advertise your services? do you think this would be legal? that is an unregulated banking sector. compare it to what we have today.

        about derivatives. there is a reason why it is so popular. the reason is that they are good. derivatives are the biggest invention in the money markets since the invention of money itself. there is absolutely nothing wrong with derivatives. in fact, derivatives are so good, they made available for the government to inflate a huge housing bubble in a way the public didn't notice. then when it burst, the very tool they used became the scapegoat.
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          Nov 1 2012: Delusion by repetition:

          Banks = good
          Governments = bad
          Regulations = bad

          If banks are not good, its not them, it's bad regulations arranged by bad governments.

          And because banks and companies are the guardian of humanity by their intrinsic nature and all intentions, we do not only have to blame the government for their unfair and evil regulations, we better get rid of them at all!

          For our own sake, for the sake of humanity, get rid of all governments, all regulations and free what is best for all of us: A free global market without any regulations whatsoever!

          Let the invisible hand guard all of us, our planet, our nature, the sick and weak and the poor and it won't take long and all our problems are finally solved and our future becomes a stable, bright and thriving promise!

          What do we need democracy for? It's a pain, because it will produce governments, which will produce all this needless and dangerous regulations which has kept us all this centuries from our capitalist paradise!

          And of course we need derivatives, they are good, all of us need them, because they provide us security against any change in the market. They help us to calculate our future. They offer us a nice playground for gambling, so that we finally get to use all our cristal balls, which otherwise would just lay arround as dust-catcher. And derivatives have no risk at all! They are a perfect instument to orchestrate our economy, just by itself and because no one is able to misuse them or to use them for lower purposes. Derivatives are one key to make all of our lifes more safe and easy and no one will be left behind, forever.

          So why are we people not getting it? Why don't we see that our tax money is helping our banks to overcome all the evil regulations they have been spellbound with by our evil governments?

          We are not bailing out banks, people, we are bailing out our very own and happy future!

          Open the market! Down with reguations! Down with governments!


          Delusion by repetition...
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        Nov 1 2012: well said.
  • Oct 30 2012: I wasn't aware of this Also, have you returned to something like a more cautious version of the old system now. Really we Americans to our own detriment do not pay attention to new innovations. In addition, talk is more important than the walk. Look at Iceland - A great place for farmers and fishermen. A place where the population has almost been lost or at least had really bad times since Eric the Red. Some of our top people have told them about all the money they could make - Well maybe not the farmers and fisherman. The most beautiful women in the World and no poor people - Sounds like a success at least Bobby Fischer thought so But someone was going to be rich Look what happened. A popular old movie in America is "it's a Wonderful Life' The hero is not Mr. Potter the banker.
    • Oct 30 2012: "have you returned to something like a more cautious version of the old system now."

      The nationalization of the banks in Norway was only for a short period of time, we've definitely gone back to the central banking system again.

      "Look at Iceland - A great place for farmers and fishermen."

      Funny you should mention Iceland. They actually went to the street and demanded change of government, after the stock market crash which crashed their banks and where they were initially made to bail out the banks, and got through. And when a national poll were hold about tax payers bailing out the banks, 93% said no way. Not only that, they are now currently writing a new constitution, that would free the country from the power of international finance and money, done by the people, through the internet, and not the politicians because of the deep mistrust towards politics. They took matters into their own hands and no one is reporting this. Unbelievable.
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    Oct 29 2012: The more centralized the money is the further away it gets from the small business person that needs it. The small community bank is much more transparent and less likely to do irresponsible things with your deposits and savings. I you truely want to balance and evenly distribute currency you need to spread it out among a large number of competitive players. Centralize defeats competition and drives up curruption in the form of unwarrented points and fees.
    • Oct 30 2012: John Smith helped me articulate it, so please take a second look at my description. Sorry for the inconvenience.
    • Nov 1 2012: Wade: you're right. So , logically, that should result in drastic limits placed on the size of Banks. They should be constrained , by their GOVERNMENT ISSUED CHARTERS, to be "Too small to Fail spectacularly".
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    Oct 29 2012: Is your question whether a country's central bank which controls money supply as well as the interest rates other banks pay should be government run or entirely privatized?
    • Oct 29 2012: I believe that what he asks is which would be the better of these two systems:

      1) the current central banking system with many private banks and one central bank per country

      2) a system with only nationalized banks
      • Oct 30 2012: This is exactly what I mean. Thank you for articulating it for me, John. Please forgive me while I shamelessly steal your comment including it in my description!
      • Nov 1 2012: Why not a mixture? I belong to a City Credit Union. It's not government run, and its not Private. It's similiar to an electric coop. Seems like the best of both worlds..
        • Nov 10 2012: Is it owned by the municipality or the is it just a credit union (owned by members) with the word "City" glued to it? In the former case it's government run (a municipality is a government), in the latter case it's privately run.
  • Oct 29 2012: And I agree with both, Krisztián and Fritzie.

    I am not sure, but are you talking about the difference between "reserve banks" and "nationalized banks"? Each country has its own set of terms, where sometimes their usage does not match the usage in other countries.

    Also, I think you misused the word "beneficiary". Perhaps, you meant "beneficial"?
    • Oct 29 2012: I'm a little confused about the terms myself, to be completely honest. I think I mean the difference between "reserve banks" and "nationalized banks", where nationalized banks are owned by the government and reserve banks are privately held. Would this be a right distinction?
      • Oct 29 2012: Not exactly. Reserve banks (https://en.wikipedia.org/wiki/Central_bank on wikipedia) define a currency. Reserve banks get to decide lending rates, the amount of currency in circulation, print the currency notes, define the value of the currency, manage gold reserves, etc.

        But your definition nationalized banks seems to be the same as mine. However, doing a quick search online for "nationalized bank" reveals mostly Indian banks. (Don't know why!) http://www.info2india.com/finance/banks/nationalised-banks/ was one such article. These banks seem to be run either by the state government or the central government. India has its own central bank, of course -- the Reserve Bank of India.
        • Oct 30 2012: John Smith helped me articulate it, so please take a third look at my description. I am so sorry for the big mess! Thanks for the links by the way.
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    Oct 29 2012: I agree with Krisztian that it would be fruitful to start with the definitions you propose we use in making the distinction.

    There is a wikipedia article that is flagged as unverified that makes the distinction that a Central Bank is like the Federal Reserve bank that manages currency and lends only to other banks, whereas the term National bank is used less technically or more broadly to include sometimes any commercial bank that operates nationally, any bank owned by a country rather than privately held, or any bank chartered under a national law rather than a state law, whether on not it operates nationally.

    So the term "national bank" can mean many different things. Again, this source flags itself as unverified, but if you could put forward the comparison you want here, the discussion will not quickly veer off into disputes over useful terminology.
    • Oct 29 2012: Yes, I am sorry about the confusion. Hopefully, I've clarified myself now. Or did I completely mix the terms yet again? Governments nationalizing banks means national banks, rights? Thanks for noticing that about the Wiki-article by the way.
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        Oct 29 2012: I am glad you clarified, as I absolutely would never have thought of a central bank or national bank with those definitions! For example, the bank in the US that most would consider the central bank -responsible for matters such as interest rates to other banks, money supply, and so forth- is definitely not a private bank, and the banks in the US that are called national banks are private.
        • Oct 30 2012: John Smith helped me articulate it, so please take a third look at my description. I am so sorry for the big mess!
        • Nov 1 2012: Fritzie: In the spiirit of trying to clarify the disc ussion, I hope you were not referring to the "Federal Reserve System " as "the Central Bank,"part of the government?! It pretends to be regulated by the government, but is actually a Private Cartel of Bankers. Any "regulation" that might occur is in the opposite direction, as when its members and ex-members convinced the taxpayers that their favorite banks were "Too Big To Fail" , a real triumph of self serving propaganda. Which, apparently, did not benefit small Main St. banks at all.
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        Nov 1 2012: Here is a description of the Federal Reserve Bank, the central bank in the US.

        http://en.wikipedia.org/wiki/Federal_Reserve_System
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    Oct 29 2012: just go ahead a little more, and define your terms then. what is a national bank and what is a central bank? i'm not aware of any difference between the two.
    • Oct 29 2012: Yes, I am sorry about the confusion. Hopefully, I've clarified myself now.
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        Oct 29 2012: does not help. what about the US fed? it is a private organization, but the chairman is appointed by the government, and any profits go to the central budget.

        not really important though, in essence they are the same. i doubt you can find any country in which the central bank is not closely cooperating with the government, and not heavily regulated.
        • Oct 29 2012: I realize that I've mixed up my terms here, but maybe you could help me. I think I mean the difference between "reserve banks" and "nationalized banks", where nationalized banks are owned by the government and reserve banks are privately held. Would this be a right distinction? If so, are the any differences in terms of public prosperity?
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        Oct 29 2012: and in which country you have a reserve bank that is not a state established or state controlled central bank?

        i'm not a historian person, but according to my limited knowledge, banks for long aspired such reserve against bank runs, but never was able to pull it off without the help of governments.
        • Oct 30 2012: John Smith helped me articulate it, so please take a third look at my description. I am so sorry for the big mess!
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    Oct 29 2012: Neither.
    • Oct 30 2012: John Smith helped me articulate it, so please take a second look at my description. Sorry for the inconvenience. If you still feel the same way, please feel free to elaborate.
  • Oct 29 2012: The color of a rose. Transparacy and common sense may help most ideas work better. However, the greedy will always invvent new bubbles.
    • Oct 30 2012: John Smith helped me articulate it, so please take a second look at my description. Sorry for the inconvenience.