Stress Tests and The Nationalization We Got

Direct state ownership of industry has proved disappointing almost everywhere. It turns out to be an arrangement in which a small group of people – whoever has power at or around the state enterprise – get the upside, while society as a whole gets all the downside. There is a prominent role for government in the modern economy: setting rules, enforcing contracts, supporting longer-term research and development, and trying hard to continually upgrade education. But managing banks is not part of that package, primarily because politicians should be kept away from credit. Once the allocation of loans becomes politicized, you get all kinds of pathologies and, most likely, more inflation as the central bank loses the ability to cut back on credit.

However, this does not mean that the state has no role to play in the banking system.

via Stress Tests and The Nationalization We Got « The Baseline Scenario.