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There isn't some fundamental distinction between 1 and 2. For 1, there is obviously some positive social utility in the end or else it wouldn't be good policy.

There isn't some fundamental distinction between 1 and 2. For 1, there is obviously some positive social utility in the end or else it wouldn't be good policy. But such lending may require too much capital, too large a risk pool, or too long a time horizon for an individual private bank to take on. Instead a public or policy bank steps in. It's good to have banks of different sizes serving different niches, as long as they assess risk prudently and price rationally. What you don't want is politicians micromanaging in domains in which they have no expertise, especially when they are driven by short-term, personal political objectives.

sandoooo 7y ago
The fundamental difference is in incentives. If your incentive is to generate profits, you don't want to lend to the high-risk needy because you'll lose money. If your incentive is to provide another form of social security, you're willing to subsidize. The problem comes when you force a business that really wants to align to the profit incentive (banks) to provide social subsidy by effectively charging their profit-generating customer base a premium. 1. They're incentivized to do the bare minimum necessary. 2. They're incentivized to stick to the letter and not the spirit of the law. 3. The transfer of wealth from paying to subsidized customers is opaque and nobody can do proper accounting. This is a major source of corruption and inefficiency. It's the sort of problem that's all over the place whenever the private sector is forced into providing this sort of opaque cross-subsidy. If I were to re-do this from scratch I'd privatize all the banks and let them do just the profit-making part, and have social programs solely as a function of the government, with a set yearly budget.
wegs 7y ago
That's why the fed was set up -- to make sure monetary policy is decoupled from short-term political objectives. It ain't perfect, but it's ain't bad either. We could do better than the Fed in 2020. Tech makes transparency easier.

sandoooo 7y ago

The fundamental difference is in incentives. If your incentive is to generate profits, you don't want to lend to the high-risk needy because you'll lose money. If your incentive is to provide another form of social security, you're willing to subsidize. The problem comes when you force a business that really wants to align to the profit incentive (banks) to provide social subsidy by effectively charging their profit-generating customer base a premium. 1. They're incentivized to do the bare minimum necessary. 2. They're incentivized to stick to the letter and not the spirit of the law. 3. The transfer of wealth from paying to subsidized customers is opaque and nobody can do proper accounting. This is a major source of corruption and inefficiency. It's the sort of problem that's all over the place whenever the private sector is forced into providing this sort of opaque cross-subsidy. If I were to re-do this from scratch I'd privatize all the banks and let them do just the profit-making part, and have social programs solely as a function of the government, with a set yearly budget.

wegs 7y ago

That's why the fed was set up -- to make sure monetary policy is decoupled from short-term political objectives. It ain't perfect, but it's ain't bad either. We could do better than the Fed in 2020. Tech makes transparency easier.