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The rise of state-owned banks

The crisis suggests that privately owned banks are not self-evidently better managed nor more effective at allocating capital than state-owned ones.

The banking and capital markets of the world’s developed economies are the ultimate expression of free market capitalism: wasteful, inefficient, prone to ludicrous excess in providing capital at the wrong price to the wrong users and then to periodic panic and failure. Time and again, the free market shows itself to be the worst system of capital allocation... with the possible exception of all the others.

The most recent market failure has once again sent the champions of free markets pleading for state bailouts, which politicians, fearful of a voter backlash, have happily used voters’ own money to provide. Nationalization of a failed bank in the UK and provision of state financing for its wobbling peers, US public funds used to guarantee the liabilities of a failing investment bank: these are supposed to be temporary solutions. In fact, they reveal just how closely the hand of the state always rests behind the supposed free market in money.

Beyond its use as a temporary measure, can state ownership of banks work? Most western-trained economists, financiers and policymakers will still scream: "No". They equate state ownership with sleepy, bureaucratic institutions, attracting deposits only on the basis of their low risk, to recycle them in mispriced loans – typically to failing industries that politicians want to prop up to keep voters employed – and other bad risks.

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