In reality, in a structural sense, no banking system can function purely on a private basis in a modern economy. Every major advanced economy offers some degree of state guarantee of savers deposits. No large deposit taking bank could survive if it places itself outside such a state guarantee system in competition with banks which accept such a guarantee. That is, structurally the banking system is in a permanent state whereby distributed profits, which ultimately go to bank shareholders, are appropriated privately while potential losses are guaranteed by the taxpayer – that is the population. Such a potential clash of interest between bank shareholders and the population, the privatisation of profit and the socialisation of losses, only does not operate as long as banks remain profitable – that is there are no losses which have to be picked up by the taxpayer.
The clash of interests between bank shareholders and both the taxpayer and the needs of the economy becomes direct in a situation of economic crisis such as the present - where banks suffer major losses and the economy requires a major increase in lending to enable recovery to take place.
What occurs with a state dominated banking system can be seen clearly in China at present. There state owned banks, which form the largest part of the banking system, can, and have been, simply instructed to increase lending in order to head off recession. As a result total bank lending in China rose by 19 per cent in the year to December 2008 – accelerating from a 14 per cent annual increase in the summer. As The Economist noted: 'China is perhaps the only big economy where credit growth has heated up in recent months.' This is precisely the type of counter-cyclical policy on bank lending which is required.
In contrast, in the UK tens of billions of pounds has been pumped into banks but lending is actually falling. The reason is that privately owned banks, instead of passing on the billions in loans to companies which require them, are using them to rebuild their profitability – a large part of which will be then passed on to shareholders as increased share prices and dividends. In short, the taxpayers billions are not being used for economic recovery but to subsidise bank shareholders.
Put more bluntly we, that is taxpayers, are being robbed by bank shareholders who are taking for their own profit the funds that were supposed to go to economic recovery.
The way to break through this impasse, and ensure sufficient lending starts flowing again, is to use nationalised banks to circumvent the blockage that exists in the private banking system. This is not even an extremely radical proposal. It has been advocated by, among others, Jim O'Neill, head of Global Economic Research for the well known extremist institution Goldman Sachs – who has argued that the UK should set up a national bank. Preferable would be more than one nationalised bank as it is desirable to maintain elements of decentralisation and competition among nationalised banks – a point recently stressed by Cédric Durand of the École des Hautes Études en Sciences Sociales in France.
However the fundamental issue is simple. There is at present a clear conflict between the needs of the economy, which requires more bank lending, and the desire of bank shareholders to appropriate as much public money as possible to build up their profits. The economy is thereby being strangled by the desire of bank shareholders, and their representatives, to achieve profit.
The way out of that situation, and to prevent the economy being strangled, is to stop funneling taxpayers funds through the private banking system, where a large part, or all, of it is appropriated by bank shareholders, and instead for the nationalised parts of the private banking system to step up lending to the economy. That is what China is doing. It is what the UK should be doing.
This conflict of interest can be resolved in one of two ways. Either private bank shareholders will continue to appropriate money intended to expand lending - consequently inflicting huge damage on the economy and, due to this, undermining the support of the Labour government. Or the nationalised parts of the banking system are used to get funds flowing to companies again.
At present in UK banking the conflict between the development of the economy and a fetish of safeguarding private ownership is not a long term or tangential one. It is an immediate issue of economic recovery.