Starting a Bank Is a British Town’s Solution to Funding Cuts(bloomberg.com)
bloomberg.com
Starting a Bank Is a British Town’s Solution to Funding Cuts
https://www.bloomberg.com/news/articles/2017-05-30/short-of-funds-and-long-on-dreams-a-british-town-starts-a-bank?em_pos=small&ref=headline&nl_art=4
20 comments
"For loans, there's some that would make sense for governments but not private banks. Suppose a dollar of this loan has an expected value of 99 cents for the bank, while generating $2 worth of taxable economic activity at a 10% rate. Private banks would lose a penny, municipal governments would make 19 cents."
While technically true, this is misleading. The numbers are still the same whether or not the government runs the bank. The private bank would lose 1 cent, as you mentioned, but no matter what the government is still getting the $2 in taxable revenue resulting in 20 cents to the government at the 10% rate.
Then you also need to factor in that banks have operating costs. In the case where the government gets both the tax revenue and profits (or losses) of the loan, this means that the only way for the government to make this work is if the government can run the bank more efficiently than the private bank would be run. Or, at least equal. Otherwise, the additional operating cost is a net loss to society from the inefficiency.
I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea.
While technically true, this is misleading. The numbers are still the same whether or not the government runs the bank. The private bank would lose 1 cent, as you mentioned, but no matter what the government is still getting the $2 in taxable revenue resulting in 20 cents to the government at the 10% rate.
Then you also need to factor in that banks have operating costs. In the case where the government gets both the tax revenue and profits (or losses) of the loan, this means that the only way for the government to make this work is if the government can run the bank more efficiently than the private bank would be run. Or, at least equal. Otherwise, the additional operating cost is a net loss to society from the inefficiency.
I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea.
> While technically true, this is misleading. The numbers are still the same whether or not the government runs the bank. The private bank would lose 1 cent, as you mentioned, but no matter what the government is still getting the $2 in taxable revenue resulting in 20 cents to the government at the 10% rate.
This doesn't seem misleading at all: in your scenario, the private bank would not lend so the government would not be able to collect tax revenue.
> I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea.
Why? What is the inherent quality of the government run enterprise compared to the privately run enterprise that makes the former less efficient?
This doesn't seem misleading at all: in your scenario, the private bank would not lend so the government would not be able to collect tax revenue.
> I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea.
Why? What is the inherent quality of the government run enterprise compared to the privately run enterprise that makes the former less efficient?
"Why? What is the inherent quality of the government run enterprise compared to the privately run enterprise that makes the former less efficient?
"
Because there is far less motivation to be efficient and well-run. The government can, for the most part, determine its revenue by the tax rate. How efficient would a private sector company be if they could mandate how much money was going to be guaranteed to them from their customers as a matter of law?
Also, when government agencies that are supposed to be self-sufficient lose money, they just get subsidized instead of shut down. Take a look at the USPS for a perfect example. It loses billions of dollars every year, and has for quite some time. No private sector company would survive that when it goes on for as long as it has with the USPS.
Because there is far less motivation to be efficient and well-run. The government can, for the most part, determine its revenue by the tax rate. How efficient would a private sector company be if they could mandate how much money was going to be guaranteed to them from their customers as a matter of law?
Also, when government agencies that are supposed to be self-sufficient lose money, they just get subsidized instead of shut down. Take a look at the USPS for a perfect example. It loses billions of dollars every year, and has for quite some time. No private sector company would survive that when it goes on for as long as it has with the USPS.
USPS has several laws affecting it's profitability due to battles in Congress that simply a small government would not have (or be able to sustain).
One is being required to over pay it's pensions to shore up the deficit other federal agencies have not made to the federal pension. Another is a requirement to serve mail all 5 working business days regardless of how rural a location it is. USPS actually delivers foreign letters, that can contain small items below cost, as do all nations mail systems due to international treaty. Congress has also has placed limits on how much USPS can raise the cost of a stamp.
And then there is the USPS union battles.
There are plenty of small government agencies that run very well simply because private enterprise has been uninterested or incompetent. Chattanooga TN's utility provider can match Google Fiber on $70 gigabit internet.
One is being required to over pay it's pensions to shore up the deficit other federal agencies have not made to the federal pension. Another is a requirement to serve mail all 5 working business days regardless of how rural a location it is. USPS actually delivers foreign letters, that can contain small items below cost, as do all nations mail systems due to international treaty. Congress has also has placed limits on how much USPS can raise the cost of a stamp.
And then there is the USPS union battles.
There are plenty of small government agencies that run very well simply because private enterprise has been uninterested or incompetent. Chattanooga TN's utility provider can match Google Fiber on $70 gigabit internet.
I realize you didn't intend this, but as I read what you wrote I can't help but take it as supporting my claim. What you said about the USPS is a perfect example of why the government frequently does a terrible job running operations like this. None of that (except the union battles) would exist if it weren't for government nonsense.
I would be curious to see the details on Chattanooga's ability to provide those lines for comparable cost. My guess is that they get tax breaks that Google doesn't and/or don't have to pay for something else that Google has to - i.e. the land to run the lines. I would be utterly shocked if they didn't have some advantage that existed purely as a result of them being a government agency and were able to compete with Google. Because if they have any advantage, it's not really a fair competition.
I would be curious to see the details on Chattanooga's ability to provide those lines for comparable cost. My guess is that they get tax breaks that Google doesn't and/or don't have to pay for something else that Google has to - i.e. the land to run the lines. I would be utterly shocked if they didn't have some advantage that existed purely as a result of them being a government agency and were able to compete with Google. Because if they have any advantage, it's not really a fair competition.
I don't think you see my point. There is a reason why I wrote "due to battles in Congress that simply a small government would not have (or be able to sustain)."
Mandates, turf battles, happen in large corporations as well as government. Chiefdoms, out of touch executives, in large corporations are as common as partisan battles in Congress.
Small governments, like small businesses can operate with a certain quickness and laser focus that larger organizations do not operate under. Which was a point of the article, large banks were ignoring small business lending in these small towns.
> I would be utterly shocked if they didn't have some advantage that existed purely as a result of them being a government agency
I believe you shall be shocked. The state of Tennessee actually barred them from extending service to other towns because Comcast lobbied/bribed the state.
The reason they put in fiber is because the locally owned power municipality needed the fiber to monitor for down lines. The municipality claimed the cost savings for having employees drive around every time the power was cut paid for itself in a few years. The fiber broadband itself is a profit center.
Mandates, turf battles, happen in large corporations as well as government. Chiefdoms, out of touch executives, in large corporations are as common as partisan battles in Congress.
Small governments, like small businesses can operate with a certain quickness and laser focus that larger organizations do not operate under. Which was a point of the article, large banks were ignoring small business lending in these small towns.
> I would be utterly shocked if they didn't have some advantage that existed purely as a result of them being a government agency
I believe you shall be shocked. The state of Tennessee actually barred them from extending service to other towns because Comcast lobbied/bribed the state.
The reason they put in fiber is because the locally owned power municipality needed the fiber to monitor for down lines. The municipality claimed the cost savings for having employees drive around every time the power was cut paid for itself in a few years. The fiber broadband itself is a profit center.
>Because there is far less motivation to be efficient and well-run.
A) There is plenty of motivation to be efficient and well run - electoral incentives, career incentives, etc.
B) In an oligopolistic market (which banking DEFINITELY qualifies as) there is less motivation to be well run in the private sector.
C) Competition works just the same way if it's coming from the public sector or the private sector. Competition from the public sector is a good way of disciplining the public sector and incentivizing it to be better run.
>Also, when government agencies that are supposed to be self-sufficient lose money, they just get subsidized instead of shut down.
Perfectly acceptable if they're serving a public purpose. Do you propose that the military start making a profit? That might be hard.
A) There is plenty of motivation to be efficient and well run - electoral incentives, career incentives, etc.
B) In an oligopolistic market (which banking DEFINITELY qualifies as) there is less motivation to be well run in the private sector.
C) Competition works just the same way if it's coming from the public sector or the private sector. Competition from the public sector is a good way of disciplining the public sector and incentivizing it to be better run.
>Also, when government agencies that are supposed to be self-sufficient lose money, they just get subsidized instead of shut down.
Perfectly acceptable if they're serving a public purpose. Do you propose that the military start making a profit? That might be hard.
No, I don't expect the military to turn a profit because the military is not an entity that is expected to be self-sufficient. I included that wording specifically because it is key for the agency/entity being examined. I don't expect the schools, military, police, fire, etc. to be profitable.
As for the subsidies, I do not find it "perfectly acceptable" at all. That just means the cost is spread to non-users and society as a whole pays more for the service than we would otherwise. Take public transportation. The services near me are cheaper than the private companies because they are subsidized by the government so they can charge less. All this means is that people who drive their own vehicles and don't use public transportation end up paying for their non-use of the public transportation system. Also, the employees of the public transportation system have wages, benefits, and retirement packages that are far superior to the private sector ones. Guess who pays for all that? They are getting special treatment far above what the free market allows.
The electoral incentives are not to be well run - they are to employ as many people as possible in that government agency and look good. It is usually to their benefit to overstaff than be lean and efficient. How good does it look when they are letting people go? The CFO of my previous company got let go during a merger we went through. He went to work for a government agency and he told me that he quite literally does the work of 5 people because he's used to having a full plate and can do what they consider a full day's work at that agency in about 2 hours.
As for the subsidies, I do not find it "perfectly acceptable" at all. That just means the cost is spread to non-users and society as a whole pays more for the service than we would otherwise. Take public transportation. The services near me are cheaper than the private companies because they are subsidized by the government so they can charge less. All this means is that people who drive their own vehicles and don't use public transportation end up paying for their non-use of the public transportation system. Also, the employees of the public transportation system have wages, benefits, and retirement packages that are far superior to the private sector ones. Guess who pays for all that? They are getting special treatment far above what the free market allows.
The electoral incentives are not to be well run - they are to employ as many people as possible in that government agency and look good. It is usually to their benefit to overstaff than be lean and efficient. How good does it look when they are letting people go? The CFO of my previous company got let go during a merger we went through. He went to work for a government agency and he told me that he quite literally does the work of 5 people because he's used to having a full plate and can do what they consider a full day's work at that agency in about 2 hours.
"No, I don't expect the military to turn a profit because the military is not an entity that is expected to be self-sufficient."
Your expectations about what is and what is not supposed to be self sufficient are not defined. What is wrong with "does it serve a public purpose?"
"As for the subsidies, I do not find it "perfectly acceptable" at all. That just means the cost is spread to non-users and society as a whole pays more for the service than we would otherwise."
It's the best way to fund things which do benefit society as a whole - like a well functioning banking system.
Furthermore, an anti-competitive private market (of which banking qualifies like I said before) also levies a cost spread to both non-users and society. Having the FIRE sector consume 1/3 of GDP is not an efficient allocation of resources and this deadweight loss impacts everybody.
"Take public transportation. The services near me are cheaper than the private companies because they are subsidized by the government so they can charge less. All this means is that people who drive their own vehicles and don't use public transportation end up paying for their non-use of the public transportation system."
Which is surely entirely fair because they impose greater externalities on the rest of us - both with traffic and pollution?
"Also, the employees of the public transportation system have wages, benefits, and retirement packages that are far superior to the private sector ones. Guess who pays for all that? They are getting special treatment far above what the free market allows."
There's no such thing as a free market. It's a myth. A fairy tale. There's markets and market pressures.
Your expectations about what is and what is not supposed to be self sufficient are not defined. What is wrong with "does it serve a public purpose?"
"As for the subsidies, I do not find it "perfectly acceptable" at all. That just means the cost is spread to non-users and society as a whole pays more for the service than we would otherwise."
It's the best way to fund things which do benefit society as a whole - like a well functioning banking system.
Furthermore, an anti-competitive private market (of which banking qualifies like I said before) also levies a cost spread to both non-users and society. Having the FIRE sector consume 1/3 of GDP is not an efficient allocation of resources and this deadweight loss impacts everybody.
"Take public transportation. The services near me are cheaper than the private companies because they are subsidized by the government so they can charge less. All this means is that people who drive their own vehicles and don't use public transportation end up paying for their non-use of the public transportation system."
Which is surely entirely fair because they impose greater externalities on the rest of us - both with traffic and pollution?
"Also, the employees of the public transportation system have wages, benefits, and retirement packages that are far superior to the private sector ones. Guess who pays for all that? They are getting special treatment far above what the free market allows."
There's no such thing as a free market. It's a myth. A fairy tale. There's markets and market pressures.
> Because there is far less motivation to be efficient and well-run.
On its face, this seems like a simple problem to solve. In practice, I can see how it would tend towards inefficiency with the tax system you've proposed.
Other posters have tackled the question of monopoly/duopoly/oligopoly. In practice, I can see how markets tend towards oligopoly.
It would be nice if we had systems that would tend towards high levels of the kind of efficiency that we want, but I think we should actively manage all of our systems for optimal results. This would mean keeping government organizations accountable for costs versus benefits as well as keeping markets competitive.
If the USPS is losing money on every letter sent, maybe it could put itself out of business by encouraging alternatives to physically sending letters. This is a behavior that would not be encouraged by a private sector company.
On its face, this seems like a simple problem to solve. In practice, I can see how it would tend towards inefficiency with the tax system you've proposed.
Other posters have tackled the question of monopoly/duopoly/oligopoly. In practice, I can see how markets tend towards oligopoly.
It would be nice if we had systems that would tend towards high levels of the kind of efficiency that we want, but I think we should actively manage all of our systems for optimal results. This would mean keeping government organizations accountable for costs versus benefits as well as keeping markets competitive.
If the USPS is losing money on every letter sent, maybe it could put itself out of business by encouraging alternatives to physically sending letters. This is a behavior that would not be encouraged by a private sector company.
Skin in the game seems to be a large factor. Government workers tend towards better job security (less of a stick) and don't tend to get bonuses (smaller carrot) than private sector.
This is of course by design, since favoritism is generally acceptable in a private organization but (the perception of it) poison to govt roles.
This is of course by design, since favoritism is generally acceptable in a private organization but (the perception of it) poison to govt roles.
> I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea.
It depends on the bureaucracy of each country, but for countries in the top 10 of the HDI [1] who have proven they can run effective public organisations (perhaps excluding the US who are tied with Canada at #10) I'd say that because their governments can play the long game i.e. not be hamstrung by fiduciary duty -- to constantly deliver profits in the short term -- they can focus on more abstract ways of capturing value.
In a metaphorical sense private banks are forced to feed on the lowest-risk, fastest ROI food which allows them to merely live another day and repeat the process over and over while government-run banks can eat foods that require more time to digest but reap greater rewards due to the circular nature of that ecosystem. A more successful, gainfully employed community is one that is less of a burden to the government, and an effectively funded government can further aid communities.
[1] https://en.wikipedia.org/wiki/Human_Development_Index
It depends on the bureaucracy of each country, but for countries in the top 10 of the HDI [1] who have proven they can run effective public organisations (perhaps excluding the US who are tied with Canada at #10) I'd say that because their governments can play the long game i.e. not be hamstrung by fiduciary duty -- to constantly deliver profits in the short term -- they can focus on more abstract ways of capturing value.
In a metaphorical sense private banks are forced to feed on the lowest-risk, fastest ROI food which allows them to merely live another day and repeat the process over and over while government-run banks can eat foods that require more time to digest but reap greater rewards due to the circular nature of that ecosystem. A more successful, gainfully employed community is one that is less of a burden to the government, and an effectively funded government can further aid communities.
[1] https://en.wikipedia.org/wiki/Human_Development_Index
Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be made, and never would be in the private sector.
The core function of the loan and investment part of the financial sector can be summarized simply as "to provide the efficient allocation of capital". Making bad loans is not part of that function, nor should it be. The money can be put to better use elsewhere.
Also, let's not forget that if the government ran a bank, it would still have liabilities to its depositors and still has to pay interest to them. Making bad loans jeopardizes that, and can make the bank non-competitive. Sure, the tax revenue would be nice, but you won't keep your depositors for the long term with this approach.
The core function of the loan and investment part of the financial sector can be summarized simply as "to provide the efficient allocation of capital". Making bad loans is not part of that function, nor should it be. The money can be put to better use elsewhere.
Also, let's not forget that if the government ran a bank, it would still have liabilities to its depositors and still has to pay interest to them. Making bad loans jeopardizes that, and can make the bank non-competitive. Sure, the tax revenue would be nice, but you won't keep your depositors for the long term with this approach.
The problem here is why the expected value of the loan is only 99 cents, if $2.00 of economic activity is being created?
And the simple reason is because markets are imperfect, and the downstream positive (or negative) effects of actions do not always flow upstream to the private decision-maker.
This is why governments exist in the first place, to coordinate the actions of large groups of individuals for mutual benefit when smaller entities (like corporations) would not be able to do achieve that same coordination.
We would never have gone to the moon if the government never got involved. Wisely, the government farmed out much of that work to private contractors, but government still had to be there to set a direction and get the ball rolling.
And the simple reason is because markets are imperfect, and the downstream positive (or negative) effects of actions do not always flow upstream to the private decision-maker.
This is why governments exist in the first place, to coordinate the actions of large groups of individuals for mutual benefit when smaller entities (like corporations) would not be able to do achieve that same coordination.
We would never have gone to the moon if the government never got involved. Wisely, the government farmed out much of that work to private contractors, but government still had to be there to set a direction and get the ball rolling.
>Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be made, and never would be in the private sector.
It'd be a good loan to make if the business development subsidy took the form of a tax break instead. If the government agreed to halve it's taxes on that particular business venture, there'd be 109 cents on the dollar worth of value to divvy up between the lender and the entrepreneur.
I actually don't know if subsidized access to capital is better for business development than preferential tax treatment.
It'd be a good loan to make if the business development subsidy took the form of a tax break instead. If the government agreed to halve it's taxes on that particular business venture, there'd be 109 cents on the dollar worth of value to divvy up between the lender and the entrepreneur.
I actually don't know if subsidized access to capital is better for business development than preferential tax treatment.
>The private bank would lose 1 cent, as you mentioned
Sorry if it wasn't clear. The bank would rather deny the loan than lose a penny on the dollar (in expectation). The government would rather approve the loan, since it makes 19 cents on the dollar once you count taxable revenue. The private-banking counterfactual has the bank essentially remove 20 cents of taxable revenue from the government because they'll deny a loan rather than lose money on it.
Sorry if it wasn't clear. The bank would rather deny the loan than lose a penny on the dollar (in expectation). The government would rather approve the loan, since it makes 19 cents on the dollar once you count taxable revenue. The private-banking counterfactual has the bank essentially remove 20 cents of taxable revenue from the government because they'll deny a loan rather than lose money on it.
>Suppose a dollar of this loan has an expected value of 99 cents for the bank, while generating $2 worth of taxable economic activity at a 10% rate.
Apart from miscalculating the expected returns or mispricing the resulting goods and services, I'm having a hard time imagining a realistic scenario in which increased economic activity from a capital injection can result in increased tax revenue to the state but not increased interest revenue to the lender.
Apart from miscalculating the expected returns or mispricing the resulting goods and services, I'm having a hard time imagining a realistic scenario in which increased economic activity from a capital injection can result in increased tax revenue to the state but not increased interest revenue to the lender.
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In a similar vein, there's an enjoyable documentary called Bank of Dave about a British millionaire trying to create a small bank in his home town. The first part's here: https://youtube.com/watch?v=0fIGZOe-Oa0
For loans, there's some that would make sense for governments but not private banks. Suppose a dollar of this loan has an expected value of 99 cents for the bank, while generating $2 worth of taxable economic activity at a 10% rate. Private banks would lose a penny, municipal governments would make 19 cents.
It does leave two big questions. First is how big this class of loans actually is in practice. If there's not much there, the overhead of running it through government doesn't make sense. Second is how to keep incentives aligned and un-corrupted. I'm pretty worried that "drive economic development" will become a pretext for "give handouts to friends and political supporters".