Public Banks

One of the more unusual ideas floating around the Internet is the creation of public banks. This strikes me as an especially bad idea, even though it has apparently been successful in North Dakota. Their success appears to come from prudent banking practices, which is a good idea for all banks.

The problem with publicly owned banks would be politics. Just look at how politicians have interfered with the publicly owned auto companies and the banks already partially owned by the government.

The motivation of the proponents is ire at the banks and our ongoing financial turmoil. But many analysts say that the banks acted rationally given the crazy rules that politicians put in place. Our government created a market for shaky debt (see Fannie Mae) and otherwise pressured banks to make shaky loans (see HUD, federal bank regulators, etc.). Our government created a moral hazard which encouraged excessive risk (see FDIC) and established bizarre accounting conventions. It’s hard for me to see how any other outcome was possible!

The real tragedy is that this was a true bipartisan effort spanning multiple presidencies and Congresses. The only conclusion I can draw is that ideas with strong bipartisan support can sometimes be real stinkers.

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