What’s wrong with public banks?

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“Can’t we just get the government to give loans to businesses?” say liberals.

“Wouldn’t it be great if we could have government-run banks in every state to kick-start the economy?”

In fact, according to the Huffington Post, “More U.S. states are exploring the possibility of establishing banks owned by their state’s government, according to a recent American Banker report.”

This could not be a worse idea, and here’s why.

The main reason why government would loan money is to give people who are not able to get a loan from private lenders the opportunity to create and grow a business. At face value, the idea seems good. Put the man to work and make him productive. However, deeper down it is a bad idea.

Let’s take two people. Bob and Jim.

Bob wants to buy a new farm and new machinery, but private lenders have chosen not to loan money to Bob, or have only offered him loans with a high interest rate. This is because he has a track record of unreliability and history of failed businesses. Bob is a less efficient and lazier worker, so he is unlikely to make a profit to pay back the loan.

Jim, however, is a very efficient worker and easily gets a loan from the bank at a low interest rate to buy the farm and machinery.

Now, because there are a finite number of machines that the machine factory can sell, if Bob, the least productive worker, receives the loan from the government and buys the machine, this will inevitably be at the expense of Jim, the more productive worker.

When this happens on a larger scale, less productive people like Bob are able to get loans and gain access to machinery and capital goods at the expense of more productive workers. Capital and machinery are therefore wasted. The productivity of the overall economy goes down, and the total economic output decreases as well.

The same situation repeats itself for all sorts of different business, not just farming. Businesses need to purchase capital goods, land and other resources, of which there is a finite amount.

If a less productive worker opens a shop, the land for that shop has been taken, and therefore it is at the expense of a more productive worker. If a less productive baker decides to open a bakery, the flour sold to the baker is at the expense of the more productive baker. If the flour was instead loaned to a more productive baker, then the economic output would increase.

This is clearly a poor use of taxpayer’s money, and a government loan system would be rife with potential for corruption, nepotism and bribery. Politicians and bureaucrats will give loans to their friends and whoever sides politically with them; the whole system of loaning will not be merit-based!

On the flip side, private lenders and banks risk their own money in a business, so they have stricter lending standards. If they loan to the wrong person they will lose their money and have no more money to lend, therefore putting them out of the business; they have a self-interested motive to do in depth research and figure out which people and businesses can make a profit.

Overall, the result of government loans is clear: private loans utilize resources more efficiently than government loans. Government loans waste more capital and resources than private loans. Therefore, government loans will reduce production and not increase it; if the loans were in private hands, the finite amount resources would be allocated more efficiently and the total economic output would increase.

If you want to read more articles by me, visit my blog at fighttheleft.wordpress.com. In my blog, I hope to provide you with articles that rebut poorly formulated left-wing viewpoints, and provide you with facts, figures and logical reasoning to keep your arguments persuasive. Armed with good information, I hope that you, the reader, will be able to defeat any leftist propaganda.

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