Twofish's Blog

January 18, 2009

Everything you thought you knew about banking was wrong

Filed under: china, finance — twofish @ 11:48 am

Victor Shih was complaining that China is destroying a decade of progress by reverting to a system of state banks in a planned economy.  China is doing it because *everyone* is changing over to a system of state banks in a planned economy.  Even if they are formally privately owned, I am certain that after this year is out, that the big US banks are going to be under so much government regulation and restrictions that they will be state controlled entities in all but name.

The name of the game in China over the last decade was to make Chinese banks work like American banks.  This actually wasn’t a bad thing since what happened in some cases was that Chinese banks started acting like the *ideal* of how an American bank should work, which is quite different from how they actually worked.  The trouble is that the American banking model is dead.  It just is, and right now people are trying to figure out what the new models are.

My personal idea is that US banks may work something like a “regulated public utility.”  That big banks deliver cash in the same way that state regulated electric companies deliver power.  The need for cash and the need for power are quite similar, and for the large number of “geeks” that work in banking, this may not be a bad thing.  If US banks start being “regulated public utilities” then there may be a place for the 21st century equivalent of “Bell Labs.”  Less money, but cool geeky basic research.

Also, I don’t know if heavy state regulation is a good thing or not.  The disadvantages of state involvement in industry are well known, but right now people are talking about heavy state involvement for two reasons.  We have a crisis that needs ideas now.  People that tend to be anti-state involvement aren’t giving them.  Among free market ideologues, what just happened was impossible, and hence they have no politically feasible ideas right now on what to do.

The only real idea I’ve heard is let the world financial system fall apart so that a great new system will come into being, but right now that’s not something that people are going to support.  Social systems are complex things.  In 1978, when Deng Xiaoping introduced markets to China, it was originally intended as just a small experiment that was a sideline.  There was the idea of a birdcage model in which markets would exist just within a small birdcage of central planning.  But what happened was that the idea worked well enough so that the bird escaped, which was a good thing.  Right now, I’m seeing people applying the same birdcage idea to state involvement in banking and industry.  Maybe limited state involvement will work, but I think it’s likely to take on a dynamic of its own.

And if you don’t like the direction that things seem to be going.  Come up with a better idea…….

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