Article
On road towards nationalization?
To combat a deepening recession, the US and the British governments have now poured trillions of dollars and euros into the financial sector. The British government increased its stake in the Royal Bank of Scotland from 58% to 70%, and the US governments’stake in Citibank rose to 36% from 8%. Reluctantly but inevitably, British and American banks appear poised to take the path of nationalization.
A: We’ve seen a lot about the US and UK bailout plans. Let me get your thoughts about how the government is getting involved with the financial system.
J: Well I think increasingly, the government has stepped in across many countries in Europe and in America. And in one way that’s the only rescue route that some of these institutions have. But on an overall basis, absolutely it’s not the right way to go. It’s probably the only immediate solution, but it’s not a good way to go. And my own hypothesis for the financial services and industry banking within that, is that it’s going to be increasingly government owned. And that is no different from where it is in Asia. In Asia, if we look at China, the big banks are government owned, in India, 85% is government owned. So I think the west is, which is all privatized going to the Asia model of having a large amount of government ownership in the banking industry. It will be far higher regulated than it ever was before. Some of it is just to cover for the lack of supervision in the past, and I think it will become low growth industry given the high leverage the industries enjoyed which is getting deregulation now, but is not likely to go back to the same levels of leverage just having learnt from it so at least for the period, we’ll see low leverage and so that will be low growth, and it will definitely be in relative terms poorly compensated as an industry. So I think it’s becoming more like a utility industry, government owned, government regulated, low growth, poorly compensated.
A: So why would that necessarily be bad because it seems to be working in other countries?
J: It’s working in other countries but if you see the competition in many countries, China is not the best example, because the industry is still quite regulated. But in the more free markets in Asia, you see when they compete, even though the government institutions have a much larger distribution network, a lot more access to the government business etc. they don’t perform as efficiently when it comes to customer service or even profitability. And they obviously have huge difficulty in bringing in world class products to the service out there. So I think, when you compete with the government, it’s almost given that you are going to win. So I think in the long run, there’s need for some balance, but eventually, free market is better for development.
A: Do you see that, further down the road, once the recession quiets down, and things start leveling out, is there a possibility that the government control can lessen on the banking industry in those countries?
J: I think from an ownership point, definitely. I think the restrictions that play a role in the used to be very free market players, I think they are going to find every way to return the government money and reduce government ownership. I’m quite certain about that. The one area where I doubt the government interferences are going to reduce quite substantially is in regulation and supervision.
Former American President Ronald Reagan’s famous quote:“The nine most terrifying words in the English language are:‘I’m from the government and I’m here to help’.”Now appears to be more hopeful than frightening.
A: What is going to happen between the government and the private sector down the road? How is it going to be managed over time as the government takes more and more control over the banks?
J: It’s very difficult to give you firm answer on that because you know, who knows? But I think there are a few signals that are becoming quite obvious. One is that, is going to create a very uneven situation in markets which were used to be fully private players to now having some players which are government background and some that are still private, in terms of government business etc. On the other hand, what it does is that it also creates a little bit of complication. From the customers’point of view, because they really don’t have a measure now to test, the banks that are with the government, there’s an intuitive sense that they will be protected now, they are already in the category that are too big to fail. But eventually, at the rate that the government are going in terms of having to print money to make up these big rescue packages, I mean the big ones will be fine, but there are many where these institutions are becoming too big to save, and so for consumers or customers, it’s difficult now to make those judgments between government banks, which either they have taken a view that they never fail. Or they will get so big, because some of the losses the banks have are bigger than the national economies of those countries put together.
A: So, would you agree the laissez-faire type of capitalism is over?
J: I would say that definitely needs moderation. I think most people have come to the conclusion that it has to be capitalism. It maybe slightly softer kind of capitalism than it was before. So, I think if they can sort of make that quite firmly that it is not about going back to protectionism. That will be a very strong step and then actually they can do something about it rather than just see it to be even better.