Socialized Banks Will Kill Innovation, Warns Times Columnist Tom Friedman

New York Times columnist Thomas Friedman says that President George Bush is right about something. What? That the Feds need to get out the banking business as soon as possible. As his Sunday column warns:

Let's imagine this scene: You are the president of one of these banks in which the government has taken a position. One day two young Stanford grads walk in your door. One is named Larry, and the other is named Sergey. They each are wearing jeans and a T-shirt. They tell you that they have this thing called a "search engine," and they are naming it — get this — "Google." They tell you to type in any word in this box on a computer screen and — get this — hit a button labeled "I'm Feeling Lucky." Up comes a bunch of Web sites related to that word. Their start-up, which they are operating out of their dorm room, has exhausted its venture capital. They need a loan.

What are you going to say to Larry and Sergey as the president of the bank? "Boys, this is very interesting. But I have the U.S. Treasury as my biggest shareholder today, and if you think I'm going to put money into something called 'Google,' with a key called 'I'm Feeling Lucky,' you're fresh outta luck. Can you imagine me explaining that to a Congressional committee if you guys go bust?"

And then what happens if the next day the congressman from Palo Alto, who happens to be on the House banking committee, calls you, the bank president, and says: "I understand you turned down my boys, Larry and Sergey. Maybe you haven't been told, but I am one of your shareholders — and right now, I'm not feeling very lucky. You get my drift?"

Maybe nothing like this will ever happen. Maybe it's just my imagination. But maybe not.

Emphatically, it's NOT his imagination. This is exactly what will happen if the Feds own shares in banks for long. 

Whole column can be found here. 

Note: Of course, Google did not get their start up capital from a bank, but the point is still relevant. 

Comments

[philbert]

You libertardians make me laugh. Under Reagan's watch financial regulations of the markets were gutted. Clinton went along with it as well, as Greenspan, the 'maestro' and his ilk were thought to be untouchable. This whole collapse was the result of over 25 years of deregulation. Now you want the banks to run free? Like dogs?

[EcoDude]

Philbert,

Care to document said deregulation?

[Kant feel Pietzsche]

Of course! As we all know, the breadth, scope, and sheer number of Federal regulations has dropped precipitously over the last 25 years.....dolt.

[Bobo]

I think this is a bogus analogy. Banks have never at any stage of their existence been in the business of venture capital, nor should they be. They make loans to businesses based on collateral, earnings, receivables and other boring things.

Of course, there are other reasons why the government should not be taking shares in banks, but this is not one of them.

[Jesse Walker]

Interesting, isn't it, that Thomas Friedman doesn't know what the "I'm Feeling Lucky" button does?

[P Brooks]

If Friedman actually figured it out, it must be even more obvious than I originally thought.

*****

Now you want the banks to run free? Like dogs?

It's better than putting them under the control of the jackals infesting the Congress.

[Mike]

We'll probably know within the next six months whether the bailout has worked, right Friedman?

[economist]

"You want them to run free? Like dogs?"
That's right, we must restrain the evil banks. The government never encouraged anything that could have possibly led to this crisis. This has nothing to do with public-private monstrosities, federal manipulation of interest rates, or anything with crap as an acronym.
Seriously, Lefiti, try sticking to one handle.

[John C. Randolph]

Under Reagan's watch financial regulations of the markets were gutted.

I wish!

This whole collapse was the result of over 25 years of deregulation.

Nope. It's the failure of central planning. Do the words "Federal Reserve" mean anything to you? How about "endless supply of credit at absurdly low interest rates"?

-jcr

[MikeP]

Interesting, isn't it, that Thomas Friedman doesn't know what the "I'm Feeling Lucky" button does?

Perhaps he didn't consult the Director of Internet Searches at Thomas Friedman Enterprises, LLC, on how the Google worked. Perhaps he did, but went with what he wrote because the Director of Pith at TFE said he needed the turn of phrase.

[philbert]

JCR,
Deregulation, of course! Dumbass!

[philbert]

The whole "concerned observer" handle was a bust, so I switched to FM, which was also a bust, so I decided to use my real name.

[P Brooks]

Filbert, you nut!

[John C. Randolph]

If we want to really stimulate the development of new businesses, we should make it a lot easier for small businesses to sell equity to the public. Today, thanks to the SEC that FDR and Old Joe Kennedy set up, it's not worth it to go public until and unless you want to raise tens of millions of dollars at least.

If we could buy shares in our neighborhood businesses, that's a lot of money that wouldn't be in the hands of Wall Street, and a lot of businesses wouldn't have to fund their operations with bank credit.

-jcr

[The Angry Optimist]

OMG, no wonder you're so bitter! You thought "Mortimer" was a step up from "philbert". That's like pimping Applebee's over TGI Friday's...

[economist]

Philbert,
"libertardians"? Really, even Edward could come up with better insults.

[The Angry Optimist]

You libertardians make me laugh. ...you want the banks to run free? Like dogs?

Yeah, you know, well known "libertardian" Tom Friedman and all that...

[Guy who just posted as philber]

AO,
I was joking. FM and philbert's post just take the same condescending asshole tone.

[John C. Randolph]

Deregulation, of course! Dumbass!

Oh, did money get deregulated during the Reagan administration, and nobody told me? Funny, I could have sworn that we're all still required by the legal tender laws to accept fiat currency.

-jcr

[gmatts]

"Interesting, isn't it, that Thomas Friedman doesn't know what the "I'm Feeling Lucky" button does?"

Type in "french military victories" and hit the "I'm feeling lucky" button.

[fyodor]

"Can you imagine me explaining that to a Congressional committee if you guys go bust?"

For better or worse, this is exactly what the powers that be (and the enough of the populace that supports them) want. One could argue that it's worth it to have less innovation (and less overall growth) for the promise (realizable or not) of more stability and less turbulence. One wonders, though, how many of the supporters of bank socialization understand they're making such a tradeoff (at best).

(I agree with Bobo that the analogy is a little skewed, still the larger point remains.)

[economist]

John C. Randolph,
Shhh! You're not supposed to say that New Deal regulations can lead to things the left doesn't like!

[Reinmoose]

Isn't innovation what got us into this mess in the first place? Can't we demonize innovation like we've demonized the "free market."
We should never explore anything new for fear of what it might bring. That's the new American way!

[economist]

Famous Mortimer and philbert really make me feel sorry for insulting joe's intelligence at various points in our discourses.

[economist]

Reinmoose,
Innovation is already demonized by some on the left. See precautionary principle.

[LarryA]

This whole collapse was the result of over 25 years of deregulation.

There are three kinds of financial business in the U.S. Heavily regulated, illegal, and Congress.

"I understand you turned down my boys, Larry and Sergey. Maybe you haven't been told, but I am one of your shareholders - and right now, I'm not feeling very lucky. You get my drift?"

Routine graft. No big deal. The real raid on capital will involve terms like "wind power" and "solar energy."

[domoarrigato]

It doesn't matter whether deregulation caused the crisis, or even if there was an deregulation (there wasn't). What matters is that EVERYONE KNOWS that deregulation occurred under the GOP, and that it caused the housing crisis. Just like everyone KNOWS that CO2 causes global warming.

[Greekpunk]

Philbert, does government sponsored subsidization for financially unqualified purchasers at all levels(corporations, individuals) constitute "deregulation"?

[Mike]

I never cease to be amused by commentators on the right and left who talk about "regulation" and "deregulation" as if they were quantitative notions. It's like they don't even know what those words mean.

[Fluffy]

I think that one half of Friedman's Google story actually makes sense - the Congressman's phone call.

Let's leave aside the question of banks funding innovation, since that has traditionally been the province of non-bank financial institutions anyway. [Although we may end up with a new regulation package that does away with non-bank financial institutions, which would then make this part of Friedman's story relevant.]

I think the bigger worry is that banks will be under extraordinary pressure to offer financing to "politically important" entities. That threat is partially mitigated by the type of instruments the Treasury is currently buying, but it isn't hard to foresee a situation where a future Treasury department implicitly threatens the banks to extend financing to dying auto companies, or face reprisals.

To a certain extent, we're already there. Banks that "played ball" have been assisted in devouring the assets of competitors who were euthanized by the feds. So if you're a banker watching the ascendancy of JPM, for example, it has to occur to you that maybe you might want to see what you can do to get on the list of the Fed and the Treasury's "pets".

[Mike]

"Philbert, does government sponsored subsidization for financially unqualified purchasers at all levels(corporations, individuals) constitute "deregulation"?"

Don't you know? If it's good for Wall Street, it's deregulation. If it's good for Main Street, it's regulation.

[economist]

LarryA,
You forget "ethanol".

[bill]

Article 1,Section 10,Clause 1 of the Constitution of the United States

"No State shall...make any Thing but gold and silver Coin a Tender in Payment of Debts...."

[kinnath]

Deregulation

philbert is a master of newspeak.

[Reinmoose]

I think the bigger worry is that banks will be under extraordinary pressure to offer financing to "politically important" entities

Like home "owners?"

[R C Dean]

We should never explore anything new for fear of what it might bring. That's the new American way!

See, also, "Precautionary Principle".

I think the bigger worry is that banks will be under extraordinary pressure to offer financing to "politically important" entities

Like home "owners?"

If they happen to be "Friends of [Insert Bank President]" because they are in Congress or an oversight agency, yes.

[Mo]

This is a horrible example. Banks generally fund companies that are profitable and can cover their interest with their profit. If L&S ran out of their venture money, they either go to stage two (or three or four) venture funding, go public or go bust. Banks aren't VCs. That's not the business plan, private or government owned.

With that said, government owned banks is a bad idea.

[domoarrigato]

Banks are always going to be a heavily regulated industry under a fractional reserve banking system. Government ownership (in the form of non-voting preferred shares) shouldn't make much difference to government's level of influence. Ok, go ahead and shoot me down...

[bruce]

weak stuff.

new tech companies, such as google once was, get their capital from vc firms, not banks. vc firms have the people on board to evaluate new proposals and assess the risks. they're in business to take risk, banks are in business to make (ideally, carefully underwritten) standard business loans and home loans.

complaining about socialized banks? hey, we already socialized the losses, now our only question is whether we socialize the profits too. as a taxpayer, i'm tired of being abused by fair-weather free-market people.

[thoreau]

Although Google didn't actually go for a bank loan, I've got to say that "OMG! The government might invest in the next Google!" is not the best argument against federal ownership of banks.

Mind you, there are plenty of EXCELLENT arguments against federal ownership of banks, but suggesting that the feds might invest in the next really hot and innovative and profitable firm is not one of them.

[domoarrigato]

Thoreau, I understood the argument to be that govt owned banks would be risk averse and wouldn't invest in the "next google" Of course that is also a dumb argument, since banks don't invest in companies - VC, PE, and intsitutional investors do at various appropriate moments. banks just take a fee for IPOing them.

[fyodor]

thoreau, I think you missed the point, unless you were being satirical. The point was that "the next really hot and innovative and profitable firm" would not be funded under government ownership.

Some folks have made the quite cogent point that banks don't do this, anyway.

Can someone come up with a form of "bank innovation" that turned out to be quite profitable and good for everyone but might not be allowed by government overlords? That would make the case much better.

Fluffy makes the very good point that it might be more the opposite that we'd have to worry about. And in fact, that might actually be what already played a major role in the current mess (i.e., government encouragement/backing of subprimes).

[John]

"I think the bigger worry is that banks will be under extraordinary pressure to offer financing to "politically important" entities. That threat is partially mitigated by the type of instruments the Treasury is currently buying, but it isn't hard to foresee a situation where a future Treasury department implicitly threatens the banks to extend financing to dying auto companies, or face reprisals."

Of course they will. Think Tony Rezko giving Obama a free house or Chris Dodds getting a sweetheart mortgage from Countrywide only on the scale of the entire economy. Every political grandee of every stripe will be setting up companies and getting their buddies to lean on the banks to give them the loans at the expense of more qualified applicants. Socialism is not really socialism anymore, it is just crony capitalism. These people will steal and loot the wealth of the country until there is no more to loot. Go look at places like Argentina or in the worst cases Venezuela or Zimbabwe to see what these people have in mind.

It sucks to be a connected elite in a democratic free society. You connections only get you a little bit of wealth and power. But in a socialist society, connections are everything. Since the government determines who wins and who loses, those who have the connections always win. That is why elites love socialism. Wait until they get card check and it gives a government arbitrator the authority to write union contracts and shove them down both the workers and the company's throats for two years. Then the real graft will come.

It is never about ideology with most people. It is almost always about power and stealing something that isn't rightfully yours. They are going to spread the wealth around allright.

[liberty4all]

Philbert,

You picked the wrong place to display your lack of intellect. Please consult the Brazils, pecans and cashews before you eschew laissez-faire capitalism.

Real thinkers read http://www.mises.org

[domoarrigato]

"It is never about ideology with most people."

I tend to think that the stealing and power abuse happen by the people that suceed those who set up the socialist system. Usually the well intentioned get displaced by the ruthless.

[John]

"I tend to think that the stealing and power abuse happen by the people that suceed those who set up the socialist system. Usually the well intentioned get displaced by the ruthless."

Obama is a millionaire several times over. He used his position in Congress to get the hospital where his wife works and earnmark and her a huge salary. He often teases Biden about being in Congress for 29 years and still not having any money. He is a hustler and a conman. He doesn't believe in any of that redistribution shit. At least not as it applies to him. It is all about money, power, and ego. Being the "transformational figure" and getting rich doing it.

[liberty4all]

"That the Feds need to get out the banking business as soon as possible"

Let's go one step further...get the Feds out of the MONEY (counterfeiting) business as soon as possible. Does anyone recall the consequence from dropping the gold standard? Hard money went soft...real soft...and, thus, became a political tool. The banks are just part of othe system

[fyodor]

John,

Your point is well taken, but up to a very limited point. If you try to tell the world at large that socialists are all for socialism just because of the connections it makes for them to give them great power and/or wealth, they'll laugh at you, and rightly so. There's just not enough wealth and power to go around, and most socialists aren't in that game. They may be unwittingly enabling that game for those who do play it, but that's different. You shouldn't overstate an otherwise good point, if you want MHO.

[domoarrigato]

They have such big hearts that their own personal wealth is just a drop in the bucket compared to what they want to redistribute - and anyway, shouldn't they be rewarded for all the good they are doing?

[John]

"There's just not enough wealth and power to go around, and most socialists aren't in that game. "

The reason why most of the intelligencia are socialists is that they hate the fact that they are not the most important people in society. In a capitalist world, Bill Gates and Steve Jobs are the two most important people to come out of the 1960s. They really did change the world from their garages in Berkley. In contrast, the knuckelheads that were out joining political organizations and getting PHDs in gender studies or liberal arts didn't change shit when compared to someone like Jobs or Gates. In capitalism, capitalists not thinkers matter. That fact drives the thinkers nuts. One of the great appeals of socialism is that it artificially diminishes the influence of capitalists and inflates the influence of thinkers and bureaucrats. That is why it is so seductive to academia and the media.

[thoreau]

The scenario starts with Google not getting a loan, but then continues with Google getting a loan under Congressional pressure. Mind you, I don't approve of Congress bringing pressure to bear to favor particular entrepreneurs. Still, "OMG! A Congressman might force a bank to invest in the next really hot company!" is about the lamest argument against federal ownership of banks.

[John]

"If you try to tell the world at large that socialists are all for socialism just because of the connections it makes for them to give them great power and/or wealth, they'll laugh at you, and rightly so."

Of course they are all pure at heart. They just happen to support a system that gives them more influence and power than they otherwise would have. They would laugh only because they lie to themselves.

[John]

"OMG! A Congressman might force a bank to invest in the next really hot company!" is about the lamest argument against federal ownership of banks."

Of course they won't invest in a really hot company. REally hot companies don't need Congressional pressure to get loans. They will invest in the shame company set up by COngressman so and sos chief of staff who then takes the money and either steals it or uses it to influence other things to make money.

[The Angry Optimist]

Let's go one step further...get the Feds out of the MONEY (counterfeiting) business as soon as possible.

Here's a good idea: let's parrot the Austrians and their more radical followers in everything we talk about and call the US Government "counterfeiters".

That will surely get us a fair hearing with the American public.

[domoarrigato]

TAO, thanks - I had a long weekend - was too tired to post that myself 😉

[joe]

John C. Randolph | October 27, 2008, 11:06am | #

If we want to really stimulate the development of new businesses, we should make it a lot easier for small businesses to sell equity to the public. Today, thanks to the SEC that FDR and Old Joe Kennedy set up, it's not worth it to go public until and unless you want to raise tens of millions of dollars at least.

If we could buy shares in our neighborhood businesses, that's a lot of money that wouldn't be in the hands of Wall Street, and a lot of businesses wouldn't have to fund their operations with bank credit.

That is a genuinely fascinating idea, Mr. Randolph. Can you refer me to any columns you've seen on the subject?

[joe]

The reason why most of the intelligencia are socialists is that they hate the fact that they are not the most important people in society. In a capitalist world, Bill Gates and Steve Jobs are the two most important people to come out of the 1960s.

Except that Bill Gates and Steve Jobs are what you and the McCain campaign call "socialists."

[fyodor]

The reason why most of the intelligencia are socialists is that they hate the fact that they are not the most important people in society.

Sure, people who disagree with you must all have serious character flaws.

Of course they are all pure at heart. They just happen to support a system that gives them more influence and power than they otherwise would have.

Well y'know, teachers, for example, are likely to think that teaching should be more greatly valued by society. That's human nature. So people whose livelihoods are more likely to be supported by public funds than private transactions are gonna be in favor of more of that. It's hardly nefarious (per se) and it hardly makes them elites.

[domoarrigato]

joe and JCR,

It's pretty easy to issue shares in neighboor hood businesses that aren't suject to much regulation. LLC's serve this purpose nicely as I recall..

[fyodor]

John,

You realize that the left can (and does!) make the same argument about free marketers. They're just looking out for themselves and their own and they hate college professors for being so smart and having key positions in society. Blah, blah, blah. Make the point that socialists are no better than anyone else, and you'll be right and someone might actually listen to you. Say that lust for power is the whole basis of socialism and that it's a leftist psychopathy, and you've just turned yourself into a self-marginalized crank.

[fyodor]

Note: Of course, Google did not get their start up capital from a bank, but the point is still relevant.

Agreed on general principles. But it way overstates the case and makes the example an easy target.

Again, are there any actual examples of bank innovation that would fit the same bill?

Maybe the problem is that most people (including me!) don't know enough about what bank innovation actually looks like and accomplishes for them to get very exercised about the idea of it being subject to political naysaying.

OTOH, Fluffy's and John's (if unforatunately overstated by him) point strikes a more readily understood bell, at least for me.

[robc]

domo,

Not quite the same thing. An LLC has "members" instead of "shareholders" which is just terminology, but the shares arent easily tradeable.

[liberty4all]

"That will surely get us a fair hearing with the American public"

This parrot wants to know if the American anyone is ready to listen...in the meantime, I'll continue to waltz with the Austrians.

[robc]

Again because of IRS criteria, the "economic rights" of the LLC interest might be freely transferable to an outsider, but the recipient of these rights might not be admitted as a full member, with full rights of LLC membership, unless admitted by an affirmative vote of the remaining members.

One of the restrictions on selling shares in an LLC. In a publicly traded C-corp, owning the shares gives you the full rights of a shareholder.

[robc]

There is virtually no business enterprise for which an LLC would be inappropriate, except if the company is expected to be publicly traded, or if there are so many members of the LLCs that it could not legitimately be qualified for partnership tax treatment (unless of course partnership tax treatment was not desired).

[robc]

Quotes above came from:

http://www.lectlaw.com/files/buo01.htm

[Seward]

TAO,

Here's a good idea: let's parrot the Austrians and their more radical followers in everything we talk about and call the US Government "counterfeiters".

Does one have to be an "Austrian" to find central banking as an institution problematic?

[gmatts]

"The reason why most of the intelligencia are socialists is that they hate the fact that they are not the most important people in society. In a capitalist world, Bill Gates and Steve Jobs are the two most important people to come out of the 1960s.

Except that Bill Gates and Steve Jobs are what you and the McCain campaign call "socialists."

They're also not from the 60's!

[domoarrigato]

robc,

all true. The transfer/voting issue can be effectively dealt with in the articles of incorporation if they are designed with ease of transfer in mind - which is not always the intent, but certainly possible if it were important. the number of investors or the eventual need to go public are not really huge problems in a neighboorhood enterprise.

All my point is that it's not so very difficult to raise equity capital for a small business in terms of regulatory requirements if you are willing to accept the tradeoffs - which I see as fairly minimal. People do this all the time - I have at least three friends that either operate or have invested in a small business organized as an LLC - it's super easy.

[liberty4all]

"Does one have to be an "Austrian" to find central banking as an institution problematic?"

Or a parrot?

[Franklin Harris]

This is bad news, people. This means that capitalism has been so discredited that Thomas Friedman, well known hack, thinks he can be all clever and contrarian by defending it.

This is bad.

[concerned observer]

That's right! If the government owned the banks, they would have never launched google. This is typical wingnut logic.

[fyodor]

This is typical wingnut logic.

From a "wingnut" named Thomas Friedman.

It's certainly true that he shows a shocking lack of understanding of what banks (and Google!) do, as has been noted numerous times on this thread. But at least he seems to understand at least some of the downside of regulation. Do you?

[R C Dean]

They will invest in the shame company set up by COngressman so and sos chief of staff who then takes the money and either steals it or uses it to influence other things to make money.

We will have a hard time topping this example of RC'z Law this week, folks.

[Hazel Meade]

I tend to think that the stealing and power abuse happen by the people that suceed those who set up the socialist system. Usually the well intentioned get displaced by the ruthless.

That's pretty much the thesis of The Road to Serfdom in a nutshell.

People like to argue that markets are imperfect because of human irrationality. Humans only act like rational self-interested agents 95% of the time. The rest of the time they are either unselfish (bonus), or crazy (penalty). The current crisis is an example of the crazy.

Unfortunately, employing government as a solution to the irrational part (not to mention the 95% selfishness part), tends to employ humans, who are rationally self-interested 95% of the time. Which means that 5% of the time the "right people" will do the right thing and the other 95% of the time, the other humans running the system will act rationally in their own personal self-interest by gaming the system, using their political connections to extract favors, and climbing the ladder. The most connected, and most ruthless, will tend to rise to the top.

[MJ]

But you know we have to take whatever Tom Friedman writes very seriously, because he's an intellectual.

[Philbert]

Hmmm, did someone say something about "fractional reserve banking"? Isn't this kind of free market policy one of those that leads to bubbles and the kind of crises we are experiencing now? Would libertubies outlaw this practice? If so, wouldn't that be an infringement on the free market?

So, no deregulation happened under Reagan's watch? Just a myth you say. It might be a myth on Planet of the Apes (Hey, I know they're your peeps, but this is ridiculous); Reagan deregulated the airlines, trucking, energy, and all kinds of emerging new industries (or at least refused to regulate them). Wake up and smell the bananas, you damn dirty apes!

P.S. Only the first Philbert was me. Those other posts were stolen. I don't care if you agree with me, knock off the handle counterfeiting, homeslice.

[Philbert]

Okay, Geniuses, show me the evidence where Reagan (as well as Clinton - remembered he was duped by all this free market nonsense as well) regulated the financial markets.