If he is, then he might want to ponder some of the points I make in this [previously posted] diary.
In the economics classes I’ve taught, I’ve always looked forward to the opportunity to explain one of the most important reasons (there are others) why Market economies have historically outperformed Command economies over the long run. In a Command economy, the managers of production facilities are ultimately decided by political appointments. In the old Soviet Union, many such appointments were based on good faith efforts to put qualified individuals into positions of responsibility (testing was one method used to evaluate qualifications), but many others were not. The end result was that many industrial organizations in the USSR ended up being managed by individuals who were not "the most capable" of running economic enterprises efficiently.
In Market economies, it is far more likely that you will find "the most capable" individuals in charge of business organizations. Why? In a free enterprise environment, all those individuals who believe they have the relevant knowledge to run a business in a particular industry are free to start one up, assuming they have the resources to do so. They may or may not have the skills to master all the variables involved, but if they do, they will be able to lower their firm’s costs more than their competitors. Firm managers who are not able to match the cost reductions of their competitors will not be able to compete. Over time, this process removes incompetent (or 'less competent') individuals from positions of responsibility.
Should we try less Socialism?
As you can perhaps now see, I am not an advocate of ‘Pure Socialism.’ But there are some important reasons why I am not an advocate of ‘Pure Capitalism’, either. To understand my reservations, all you need to do is imagine what life in the United States would be like if we were to decide some day to make our country even less socialist than it is right now. If capitalism really is the purely good thing that Republicans like to say it is, then we should not hesitate to bring an end to the government's involvement in fire & police protection, road & sewer construction/repair. And let’s not forget national defense.
Of course, in order to reap all the benefits of capitalism in these industries, we’d not only have to privatize them, we’d also have to make sure that there are a number of firms in each of these industries competing with each other to provide the services we want, that the government will no longer be providing. After all, without competition, why would these privately-owned organizations be any more efficient at providing services than the government would be? Without the pressure of competition, privately-owned firms are no more efficient than governments are.
So let's do it. Let's privatize the 'security' industries. How would things be different? Well, for one thing, we’d have to put up with the endless advertisements that competing police forces and competing fire departments would be putting on the air. If you ever found yourself needing to call for a police officer or a team of fire fighters, you'd first have to decide which privately-owned service you'd want to call (assuming you had not already chosen a 'provider'). You'd have to compare prices and different packages of services that they'd be offering at the time. Of course, the very first thing they would ask you if you were to call is if you were covered by that police company's protection services and if you had been current in your monthly payments.
Assuming you were covered by one of their services plans, you would then discover if/whether the plan you paid for actually covers the particular kind of service you were calling them for. Of course, some people would not pay for police or fire protection because they would not be able to afford the premiums. They'd take their chances. So if your neighbor's house caught fire, and he hadn't paid for any fire protection services, his house would burn down, but perhaps not before it ended up catching your own home on fire. Still others would be able to afford some coverage, but maybe they would have to select the high deductible option on the service package they chose, that they thought they could afford.
If the Republicans had succeeded in getting the government out of the road/sewer construction/repair business when they were in power, we would still see roads and sewers in America, but we’d also have to put up with certain inconveniences, like toll booths every few miles. Of course, in order for there to be any real competition in these industries, we'd also need to have parallel, competing highways and sewer lines. Can you imagine that? Two or more sewer lines dug so that competing firms would be able to offer the same services to the same cluster of customers? In those areas where it would be prohibitive for a private firm to build a competing highway, the fruits of competition would disappear and all users of the single road would pay monopoly prices in order to connect with the main arteries.
And if we really wanted to enjoy the benefits of capitalism in the national defense industry, we'd have to encourage the existence of competing, privately-owned armies. Of course, some Nervous Nellies out there would be concerned about the possibility that these competing armies just might want to go to war with each other some day, or that they might want to use their raw power to impose their will on Congress, but we all know that nothing like that would ever happen in America, right?
No, we need more Socialism, not less
As you can see, even though I am a big fan of free markets and privately-owned enterprises, I am also a big fan of setting up the government as the [sole][dominant] provider of services in those markets that are of vital interest to the public (e.g., defense, security, health care, transportation, education, and yes...banking). I favor the ‘socialist’ alternative in these kinds of markets when---due to inadequate competition or perverse incentives---society is deprived of the security and/or quality-of-service that it deserves.
That brings us to the ‘financial services’ industry. Banks and insurers are privately-owned companies that use other people’s money to make money for themselves. In other industries, consumers benefit from competition because it motivates firms to reduce their costs, and when they do, the result is lower prices. But that sort of thing doesn’t happen with banks, except on a very small scale. Instead, they are more likely to charge you a fee in order for you to have the privilege of letting them use your money to enrich themselves.
For bankers and insurers, profit maximization is not a matter of reducing costs. Profit maximization occurs when bankers and insurers take a chance on riskier loans and accounting practices. The riskier the loan, the greater the profit margin [rate of interest demanded of riskier borrowers). So unlike other industries, the banking & insurance industries have built-in incentives to take on excessive risk, to ‘game the system, and to put the entire nation at risk in order to persuade the government to bail them out if/when their bets go bad. This is the basic reason why the Obama/Geithner Bailout [= Bush/Paulson Bailout] is such a bad thing. Bankers and insurers are receiving the most powerful incentive of all by Congress to keep taking excessive risks and keep gaming The People’s government.
Why are our elected representatives allowing this to continue? Quite often, the money that depositors and policy holders hand over to bankers and insurers is money that they cannot afford to lose. Our political leaders have ‘nationalized’ our defense and security industries to protect us from excessive risks. Why won’t they nationalize [most of] our banking industry in order to ABSOLUTELY GUARANTEE that our economy will never again be vulnerable to another ‘panic’ in the financial sector of the economy? Why are our Congressional representatives pretending that we have no choice but to deal with the Captains of Finance, and prop them up whenever they fail to run their industry in a way that serves the best interests of society?
Taxpayers need their own bank
Both the Fed and Congress [through the Treasury department] have been pumping hundreds of billions of dollars into the privately-owned banks over the past several months in the hope that doing will enable the banks to start lending again at a pace that will return the economy to good health. Unfortunately, only a very small percentage of those billions has ended up in the hands of borrowers. This is because the banks need to hoard the free money from taxpayers in order to balance out the toxic assets that they are carrying on their balance sheets, or else they will go bankrupt.
There has always been an alternative to bailing out the private bankers and insurers who ruined our economy through their mind-boggling incompetence. All we really need in order to protect Main Street from the consequences of a collapse of Wall Street and the financial sector of the economy is A GOOD BANK that faces no restrictions/inhibitions re: lending, that is ready to fulfill all of the economy’s needs for credit even if every single one of the privately-owned banks in America were to end up in bankruptcy. That is precisely the kind of bank we would have if Congress were to create a Taxpayers’ Bank, one that is fully capitalized with taxpayer dollars and is ready to lend to businesses and homeowners in need of refinancing.
The single biggest myth being circulated by private bankers in Washington these days is the notion that ‘we’ are utterly dependent upon the privately-owned banks, that the economy will not function unless the private banks are able to lend, but that simply is not true. All Congress needs to do is authorize the Treasury Secretary to (A) buy up one of the major banks that is insolvent (BoA?) at firesale prices, (B) fire everyone in the executive suite, (C) replace them with finance professors out of academia, (D) sell off all of its ‘toxic assets’ for whatever price it can get in the marketplace [or simply write them off], (E) fully capitalize its bank with hundreds of billions of taxpayer dollars [or perhaps money created out of thin air by the Fed], and then (F) start lending according to the guidelines set by Congress.
Once Congress’ bank is ready to lend to Main Street, it could then require all of the banks to write off (or sell) all their toxic assets and submit to bankruptcy proceedings. There would be much wailing and gnashing of teeth on Wall Street and within the financial sector of the economy, but Main Street would be almost completely insulated from the evaporation of trillions of dollars of ‘paper wealth.’ In the mean time, the Taxpayers’ Bank would be offering relief to [primary residence] homeowners through re-financing on terms favorable to the borrower. Other kinds of lending the Taxpayers' Bank would make possible: business loans and installment purchases of big ticket items. One type of loan that Congress should not make available through its bank: loans to private banks and insurance companies.
After most of the private banks have gone bankrupt, we will see what kind of private banking industry rises from the ashes. At that time, Congress could decide to 'privatize' its bank if there was some compelling reason to do so, but why should it? Allow the privately-owned banks that survive the mess they created to compete with the government bank for risk-averse customers if that is what they want to do. Of course, Congress' bank would have a competitive advantage over the private banks because it would be content to offer depositors a very modest but fair return on their investments along with zero risk. With such an advantage, the government bank would completely dominate the mortgage industry and most business lending.
The surviving private banks would be free to compete with the Taxpayers' Bank for a share of the 'boring' [low-yield] types of loans, but they would not have to compete with the government for the riskier [more profitable] loans since Congress' bank would have no interest whatsoever in underwriting them. The private banks could offer higher yields to rich savers who can afford to lose some money on the chance of a higher return. Of course, these "investment banks" would not be protected by the FDIC. Moral hazard would again have an influence on the risk-taking of private bankers and insurance companies.
Socialism = America's Salvation
It might make things 'simpler' if we were to embrace either pure capitalism or pure socialism, but the ultimate truth is that we are better off when we embrace socialism in certain markets and capitalism in other markets, depending on what our most important priorities happen to be. The High Priests of Finance have finally established beyond any doubt that they can no longer be depended upon to manage the credit markets in a way that protects the economic well-being of the vast majority of the American people. Let them continue to fill a niche within the financial services sector of the economy, but let the people's government provide the essential banking services that we absolutely depend on. If we do this, we will be able to provide the American people with economic security that they truly deserve.