(Pun intended in title above.)
My letter to the local Monterey County Weekly was the lead letter yesterday. Here it is:
Bank On It
A bank owned and run by government is a bad idea (“Efforts to establish a public bank for the Central Coast are underway,” Feb. 27-March 4). There is no reason to think that a government owned bank would have lower costs. In fact, the opposite is the case. A large body of economic evidence has established that for-profit companies are more efficient than government-run ones.
The reason has to do with incentives. When a bank sees a way of cutting and reining in costs, it is more likely to do so than a government owned enterprise. Indeed, a for-profit bank, to remain competitive, must find ways to rein in costs. But a government-owned bank has no such incentive. If a government-run bank gets established, one danger is that it will get bailed out by other parts of the government. It will look successful, but will not be successful. David R.Henderson | Pacific Grove
Editor’s note: Henderson is an emeritus professor of economics at the Naval Postgraduate School.
And here’s the news item I responded to that I referenced in my letter.
READER COMMENTS
Jairaj Devadiga
Mar 8 2020 at 7:20pm
Spot on!
Anybody who thinks that establishing government banks is a good idea should look at the Indian banking sector. In India, there are numerous government run and private banks operating side by side.
Most of the non-performing assets are concentrated in government banks. While there are problems in some private banks as well, as a whole they have performed far better than their government run counterparts.
Not only are government run banks lacking the incentives and constraints you talk about, they are also prone to corruption. In India, government banks have been known to lend money to politically connected people such as Nirav Modi and Vijay Mallya, who then fled the country after failing to repay.
In the US, Dan Mitchell and Veronique de Rugy have written extensively about the rotten activities in the Export-Import Bank.
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