In the meantime, the model being developed is arm’s-length management. One senior banker in the U.K. said that the state is “just another name on the share register.” The United Kingdom has set up a double-distancing mechanism, in which an intermediary body (United Kingdom Financial Investments Ltd., or UKFI) has taken the holdings from the Treasury, and it is managing them at a distance. Bank directors are described as “government approved,” not “government appointed,” and each bank’s board is explicitly mandated to serve the interests of the company, rather than any constituency that voted for the directors. The Netherlands government has instituted a similar approach. In the U.K., in sectors other than banking, such as housing or automobiles, state aid and loan guarantees are approved only as temporary or “time-limited.”
Certainly, it is possible that the world’s policymakers and business leaders are deluding themselves and their constituents, adjusting their horizons only partially and with a lag as the world around them changes. But it is unlikely that they would want, or be allowed to return to, state control of private enterprise. Although there have been major failings in the financial sector, and much of the crisis can be attributed to the collective actions of banks and investment firms, governments have “had a bad war” too.
Governments collectively allowed huge imbalances to build up in the world economy. The adoption of inflation targeting based solely on prices of consumer goods allowed asset inflation to develop. The U.S. government actively encouraged subprime lending; the U.S. and other governments, because of their vested interest in growth and tax revenues, bought into the housing and consumer booms. They created a flawed regulation system and acquiesced in allowing banks to cheat by creating off–balance sheet financial vehicles. Governments were slow to spot signs of trouble and then fumbled their responses, clinging to fears about moral hazard or inflation long after they ceased to be relevant threats.
In short, governments’ credibility and moral stature are, at best, tarnished. The public is unlikely to endorse a role for government in managing industry, no matter how angry people are at the financial system. Many people still remember the old state enterprises, such as British Rail and the early Amtrak system, and not always with affection.
Governments will also be constrained by a variety of other factors. Their finances are under strain, with debt levels far beyond old, established limits. They are struggling to fund even their existing responsibilities and will not want to assume responsibility for funding the capital requirements of state enterprises. Governments and their agencies tend to lack people with the capability for direct financial management in a commercial setting. They will rightfully be uncomfortable taking direct responsibility for banks’ lending and foreclosure policies, remuneration systems, and commercial sponsorships.
And governments face constitutional limitations. In Europe, for example, the doctrine of state aid controls — forbidding any government intervention from distorting competition or intra-community trade — is hard-wired into the founding treaties of the European Union. If governments get too involved in underwriting or managing the borrowing of some banks, and thus compete with others that have to raise their capital in the open market, this principle would be jeopardized.
For all these reasons, few policymakers will want to take on responsibility for managing financial services. They will give priority instead to selling the assets they have acquired in order to improve their own damaged balance sheets.
But if a permanent expansion of state ownership is unlikely, what about a revival of regulation? In banking and finance, there will undoubtedly be a tightening of regulation and a retreat from the idea that risk is best dealt with by encouraging each enterprise to make its own judgments. The governor of the Bank of England, Mervyn King, has observed that international banking is “global in life, but national in death.” From this has arisen renewed interest in supranational regulation whether in the form of a genuine E.U. regulator or closer cooperation among national regulators.