The nationalization of banks can boost the economy. Why?

Amongst others, because nationalized banks are more likely to give credit to consumers and businesses, says Flemish economist Paul de Grauwe in a recent article in the Dutch edition of Metro.

Dutch socialist politician Ewout Irrgang, an advocate for the nationalization of banks, agrees with de Grauwe. He adds that it is easier for the government to support banks that are in financial trouble when they are nationalized because they get full control. Irrgang does not believe in financial injections without a solid commitment. When a bank is nationalized, there is a return of investment. The government gets a share in a company that will likely yield a profit in the future.

Another downside of financial injections is that it encourages people to buy shares in poorly functioning banks. While government money is used to keep the diseased parts afloat, shareholders can still make a profit on the healthy parts. Irrgang and de Grauwe both point out that this situation is undesirable and can be avoided by nationalizing the bank, putting both the healthy and unhealthy parts in government hands.

Jeroen Drost, CEO of the Dutch merchant bank NIBC, is also in favor of government support, either through nationalization or financial injections: “Anything [Dutch Minister of Finance] Wouter Bos can do to restore faith in the economy, in which banks play a large part, is a good thing.”

Of course, one can ask whether injecting money into suffering banks is the right thing for a government to do. Opponents say that investing tax money in leaking banks before the leak has been found and stopped is irresponsible. It means that civilians are paying for risks taken by the government. They add that the financial injections increase both national debt and unfair competition. Although, according to Irrgang and de Grauwe, the latter is not the case. Government support comes in the form of a loan and banks will still have to pay interest over them, thus leveling out most of the unfair advantage over banks that do not receive support.

While the financial injections and nationalization of banks may lead to a stronger economy, fact remains that large amounts of tax money is being spent. Perhaps we should take things a bit further, and formally make all citizens a shareholder in the nationalized bank, allowing them to share in future profits. It would be a good way to remove some of the sour taste of injustice left in many people’s mouths when banks get away with risky investments because of tax funded support. A true people’s bank: realistic concept or utopia?