The solution some people propose is straightforward: divest them. Shut them down. Erase them completely. It’s evident that I don’t hold State-Owned Banks (SOBs) in high regard. Even this publication shares concerns, feeling the urge for action: “The rampant default loan issue highlights this problem. Year after year, influential individuals, often with connections, exploit the system, obtaining loans without sufficient collateral or repayment plans”. It’s crucial to understand that this isn’t an error within the system; it’s the very purpose. Moreover, the societal loss goes far beyond the amount lost in such activities—it extends to the wasted efforts of others seeking a piece of the pie.
Let’s backtrack a bit. We desire an efficient banking system that channels our savings into profitable investments, propelling economic growth. A thriving economy benefits us all, generating returns on our invested money—be it through investment or commercial banking—boosting our prosperity. It’s a virtuous cycle: we save, the bank invests, we reap benefits, and the economy flourishes. This growth perpetuates itself, elevating us from underdeveloped to developed nations within a generation or two, ensuring a better future for our children.
We also understand that markets allocate resources more effectively than any other system. It’s plain to see—places utilizing market mechanisms for centuries are prosperous. Conversely, those that haven’t embraced markets lag behind. Those recently adopting market-driven approaches witness growth, while those reverting see decline.
Now, let’s contemplate state-directed capital allocation – essentially state-owned banks. If they allocate capital as efficiently as the market, they’re redundant, as the market would do the same in their absence. If they allocate poorly, they diminish our wealth and hamper societal progress. Why endorse a system that impoverishes us individually and collectively?
Consider the political allocation of investment funds. State banks, much like state investment funds, often mirror this phenomenon. If they lend as effectively as the market, they’re redundant; if not, they harm both individual and societal wealth. Why tolerate a system that impoverishes us?
Think of the grievances about politically influential individuals obtaining cheap loans they don’t repay. State banks lend inefficiently to those unable or unwilling to repay—a practice that erodes wealth. Reforming these banks to exclude political influence from lending decisions isn’t feasible. State banking thrives on politics, not economics or prudent business choices, dictating who gets funds. This explains why the undeserving, but politically connected, obtain loans.
It’s worse than it seems. To access these subsidized funds, borrowers must cozy up to banking authorities. Failures here are inevitable. The cheaper the funds, the greater the efforts to access them—a wasteful endeavor. The societal loss isn’t just the default loans; it’s the futile pandering by those denied access to free money.
For those operating state banks, this is the essence. The futile pandering is pleasurable. Why abandon a system attracting desperate supplicants? This system isn’t reformable – it inherently incurs systemic loss. The solution isn’t reform; it’s abolishing the system. Can we agree to steer SOBs toward societal extinction? Perhaps we can even utilize market forces to decide the most palatable way—just as we should be using markets to allocate capital in the first place.
