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"For loans, there's some that would make sense for governments but not private banks. Suppose a dollar of this loan has an expected value of 99 cents for the ba

"For loans, there's some that would make sense for governments but not private banks. Suppose a dollar of this loan has an expected value of 99 cents for the bank, while generating $2 worth of taxable economic activity at a 10% rate. Private banks would lose a penny, municipal governments would make 19 cents." While technically true, this is misleading. The numbers are still the same whether or not the government runs the bank. The private bank would lose 1 cent, as you mentioned, but no matter what the government is still getting the $2 in taxable revenue resulting in 20 cents to the government at the 10% rate. Then you also need to factor in that banks have operating costs. In the case where the government gets both the tax revenue and profits (or losses) of the loan, this means that the only way for the government to make this work is if the government can run the bank more efficiently than the private bank would be run. Or, at least equal. Otherwise, the additional operating cost is a net loss to society from the inefficiency. I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea.

turc1656 9y ago
Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be made, and never would be in the private sector. The core function of the loan and investment part of the financial sector can be summarized simply as "to provide the efficient allocation of capital". Making bad loans is not part of that function, nor should it be. The money can be put to better use elsewhere. Also, let's not forget that if the government ran a bank, it would still have liabilities to its depositors and still has to pay interest to them. Making bad loans jeopardizes that, and can make the bank non-competitive. Sure, the tax revenue would be nice, but you won't keep your depositors for the long term with this approach.
- smallnamespace 9y ago
  The problem here is why the expected value of the loan is only 99 cents, if $2.00 of economic activity is being created? And the simple reason is because markets are imperfect, and the downstream positive (or negative) effects of actions do not always flow upstream to the private decision-maker. This is why governments exist in the first place, to coordinate the actions of large groups of individuals for mutual benefit when smaller entities (like corporations) would not be able to do achieve that same coordination. We would never have gone to the moon if the government never got involved. Wisely, the government farmed out much of that work to private contractors, but government still had to be there to set a direction and get the ball rolling.
- ThrustVectoring 9y ago
  >Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be made, and never would be in the private sector. It'd be a good loan to make if the business development subsidy took the form of a tax break instead. If the government agreed to halve it's taxes on that particular business venture, there'd be 109 cents on the dollar worth of value to divvy up between the lender and the entrepreneur. I actually don't know if subsidized access to capital is better for business development than preferential tax treatment.
fiter 9y ago
> While technically true, this is misleading. The numbers are still the same whether or not the government runs the bank. The private bank would lose 1 cent, as you mentioned, but no matter what the government is still getting the $2 in taxable revenue resulting in 20 cents to the government at the 10% rate. This doesn't seem misleading at all: in your scenario, the private bank would not lend so the government would not be able to collect tax revenue. > I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea. Why? What is the inherent quality of the government run enterprise compared to the privately run enterprise that makes the former less efficient?
- dimaggiosghost 9y ago
  Skin in the game seems to be a large factor. Government workers tend towards better job security (less of a stick) and don't tend to get bonuses (smaller carrot) than private sector. This is of course by design, since favoritism is generally acceptable in a private organization but (the perception of it) poison to govt roles.
- turc1656 9y ago
  "Why? What is the inherent quality of the government run enterprise compared to the privately run enterprise that makes the former less efficient? " Because there is far less motivation to be efficient and well-run. The government can, for the most part, determine its revenue by the tax rate. How efficient would a private sector company be if they could mandate how much money was going to be guaranteed to them from their customers as a matter of law? Also, when government agencies that are supposed to be self-sufficient lose money, they just get subsidized instead of shut down. Take a look at the USPS for a perfect example. It loses billions of dollars every year, and has for quite some time. No private sector company would survive that when it goes on for as long as it has with the USPS.
  - csdreamer7 9y ago
    USPS has several laws affecting it's profitability due to battles in Congress that simply a small government would not have (or be able to sustain). One is being required to over pay it's pensions to shore up the deficit other federal agencies have not made to the federal pension. Another is a requirement to serve mail all 5 working business days regardless of how rural a location it is. USPS actually delivers foreign letters, that can contain small items below cost, as do all nations mail systems due to international treaty. Congress has also has placed limits on how much USPS can raise the cost of a stamp. And then there is the USPS union battles. There are plenty of small government agencies that run very well simply because private enterprise has been uninterested or incompetent. Chattanooga TN's utility provider can match Google Fiber on $70 gigabit internet.
icanhackit 9y ago
> I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea. It depends on the bureaucracy of each country, but for countries in the top 10 of the HDI [1] who have proven they can run effective public organisations (perhaps excluding the US who are tied with Canada at #10) I'd say that because their governments can play the long game i.e. not be hamstrung by fiduciary duty -- to constantly deliver profits in the short term -- they can focus on more abstract ways of capturing value. In a metaphorical sense private banks are forced to feed on the lowest-risk, fastest ROI food which allows them to merely live another day and repeat the process over and over while government-run banks can eat foods that require more time to digest but reap greater rewards due to the circular nature of that ecosystem. A more successful, gainfully employed community is one that is less of a burden to the government, and an effectively funded government can further aid communities. [1] https://en.wikipedia.org/wiki/Human_Development_Index https://en.wikipedia.org/wiki/Human_Development_Index
ThrustVectoring 9y ago
>The private bank would lose 1 cent, as you mentioned Sorry if it wasn't clear. The bank would rather deny the loan than lose a penny on the dollar (in expectation). The government would rather approve the loan, since it makes 19 cents on the dollar once you count taxable revenue. The private-banking counterfactual has the bank essentially remove 20 cents of taxable revenue from the government because they'll deny a loan rather than lose money on it.

turc1656 9y ago

Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be made, and never would be in the private sector. The core function of the loan and investment part of the financial sector can be summarized simply as "to provide the efficient allocation of capital". Making bad loans is not part of that function, nor should it be. The money can be put to better use elsewhere. Also, let's not forget that if the government ran a bank, it would still have liabilities to its depositors and still has to pay interest to them. Making bad loans jeopardizes that, and can make the bank non-competitive. Sure, the tax revenue would be nice, but you won't keep your depositors for the long term with this approach.

smallnamespace 9y ago
The problem here is why the expected value of the loan is only 99 cents, if $2.00 of economic activity is being created? And the simple reason is because markets are imperfect, and the downstream positive (or negative) effects of actions do not always flow upstream to the private decision-maker. This is why governments exist in the first place, to coordinate the actions of large groups of individuals for mutual benefit when smaller entities (like corporations) would not be able to do achieve that same coordination. We would never have gone to the moon if the government never got involved. Wisely, the government farmed out much of that work to private contractors, but government still had to be there to set a direction and get the ball rolling.
ThrustVectoring 9y ago
>Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be made, and never would be in the private sector. It'd be a good loan to make if the business development subsidy took the form of a tax break instead. If the government agreed to halve it's taxes on that particular business venture, there'd be 109 cents on the dollar worth of value to divvy up between the lender and the entrepreneur. I actually don't know if subsidized access to capital is better for business development than preferential tax treatment.

fiter 9y ago

> While technically true, this is misleading. The numbers are still the same whether or not the government runs the bank. The private bank would lose 1 cent, as you mentioned, but no matter what the government is still getting the $2 in taxable revenue resulting in 20 cents to the government at the 10% rate. This doesn't seem misleading at all: in your scenario, the private bank would not lend so the government would not be able to collect tax revenue. > I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea. Why? What is the inherent quality of the government run enterprise compared to the privately run enterprise that makes the former less efficient?

dimaggiosghost 9y ago
Skin in the game seems to be a large factor. Government workers tend towards better job security (less of a stick) and don't tend to get bonuses (smaller carrot) than private sector. This is of course by design, since favoritism is generally acceptable in a private organization but (the perception of it) poison to govt roles.
turc1656 9y ago
"Why? What is the inherent quality of the government run enterprise compared to the privately run enterprise that makes the former less efficient? " Because there is far less motivation to be efficient and well-run. The government can, for the most part, determine its revenue by the tax rate. How efficient would a private sector company be if they could mandate how much money was going to be guaranteed to them from their customers as a matter of law? Also, when government agencies that are supposed to be self-sufficient lose money, they just get subsidized instead of shut down. Take a look at the USPS for a perfect example. It loses billions of dollars every year, and has for quite some time. No private sector company would survive that when it goes on for as long as it has with the USPS.
- csdreamer7 9y ago
  USPS has several laws affecting it's profitability due to battles in Congress that simply a small government would not have (or be able to sustain). One is being required to over pay it's pensions to shore up the deficit other federal agencies have not made to the federal pension. Another is a requirement to serve mail all 5 working business days regardless of how rural a location it is. USPS actually delivers foreign letters, that can contain small items below cost, as do all nations mail systems due to international treaty. Congress has also has placed limits on how much USPS can raise the cost of a stamp. And then there is the USPS union battles. There are plenty of small government agencies that run very well simply because private enterprise has been uninterested or incompetent. Chattanooga TN's utility provider can match Google Fiber on $70 gigabit internet.

icanhackit 9y ago

> I don't know about you, but I would never, ever count on the government running anything more efficiently than the private sector. This is a bad idea. It depends on the bureaucracy of each country, but for countries in the top 10 of the HDI [1] who have proven they can run effective public organisations (perhaps excluding the US who are tied with Canada at #10) I'd say that because their governments can play the long game i.e. not be hamstrung by fiduciary duty -- to constantly deliver profits in the short term -- they can focus on more abstract ways of capturing value. In a metaphorical sense private banks are forced to feed on the lowest-risk, fastest ROI food which allows them to merely live another day and repeat the process over and over while government-run banks can eat foods that require more time to digest but reap greater rewards due to the circular nature of that ecosystem. A more successful, gainfully employed community is one that is less of a burden to the government, and an effectively funded government can further aid communities. [1] https://en.wikipedia.org/wiki/Human_Development_Index https://en.wikipedia.org/wiki/Human_Development_Index

ThrustVectoring 9y ago

>The private bank would lose 1 cent, as you mentioned Sorry if it wasn't clear. The bank would rather deny the loan than lose a penny on the dollar (in expectation). The government would rather approve the loan, since it makes 19 cents on the dollar once you count taxable revenue. The private-banking counterfactual has the bank essentially remove 20 cents of taxable revenue from the government because they'll deny a loan rather than lose money on it.