A middle ground in the banking crisis
A major question in the government response to the banking crisis is choosing between the “evils” of nationalization of banks that would however provide stability, versus the “benefits” of saving of the private banks that would innovate and compete in a market system.
As the dean of the Tuck School of Business I’m privileged to speak with a wide range of economists, bankers, Wall Street executives and our own students, and what I’m interested in is finding an answer somewhere in the middle ground:
* First decide what major businesses absolutely need in banking services and then set up a ‘facility’ to assure that that those prime banking services will be available. This facility would initially be owned by the government but with an explicit goal of going to full private ownership as soon as feasible.
* Make that facility a separate legal entity from private banks.
* Let the private banks operate these “franchised” facility under close scrutiny.
* Have a process by which the private banks ultimately benefit from the operations of the ‘facility’ by having them acquire an increasing ownership in them.
* Though managed by private banks after absorption, the facilities would remain legally separate.
The trick is to be able to absorb the facility into the private banks after the crisis and not along the way destroy the private banking system as we know it, which means that the private banks must seen as benefiting from the scheme. To the extent that the facility does well, the banks would benefit in that they would have the ultimate ownership; and if the facility does poorly the government would have to absorb the losses, at least in the initial stages.
If the government did set up an initial $200 billion facility it could then be leveraged to say $2 trillion in loans. The “good” facility would be available to all companies for a limited list of transactions for the duration of the crisis, with say a minimum of five years. We could then let the markets settle the bad assets issues in the private banks. Some would fail and some would survive.
After the absorption of the facility the resulting private banks would have two parts, one highly regulated that would provide on-going assurances to the business community, and one relatively unregulated that would allow innovation and society would glean whatever benefits we are supposed to get from that kind of activity.
The government would over time get compensated by the investments made by the payment for the ownership of the facilities.