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How To Make a Silk Purse from a Sow’s Ear

The sow’s ear in question is the decision that is either coming or has already been made to convert millions or billions of dollars worth of the preferred stock of eight “rescued” banks into common stock.  The explanation given is that it will improve the banks’ operating ratios, and thus do more good than keeping the preferred stock will.  The reason this isn’t a silk purse already is that it also means the US Government will have massively expanded voting rights as a result of the exchange.  The Government will even end up with voting control of some banks.  This will mean, in fact, that those banks will be nationalized banks, controlled by the Government.  We as a nation will be in the banking business.

To briefly list the problems with a nationalized banking industry:  Unfair competition against the non-nationalized banks.  Certain voting groups will receive preferential treatment from the Government bank, giving them an unfair advantage over their competitors for loans and services.  Employees of these banks will now depend upon their Government-employed Managers for their employment.  The whole banking system will be out-of-balance, with the big thumb of the Government on the scale.  For more, read Thomas Sowell.

These problems, spread more generally, were among those I wrote about years ago in the discussion of mini-privatization of the Social Security system.  The direct purchase of stocks on the open market by the Government on behalf of Social Security would be unacceptable for those reasons and more.  Centralized decisions would mean Government favoritism, picking winners and losers in some cases.  Therefore, I argued that the mini-privatization would have to be accomplished using individual accounts, where private citizens could make their own buy and sell decisions, or through index funds, where no government official would be making any decision that resulted in funds being directed towards one company rather than another.

So this brings me to the silk purse.  If/when this conversion to common stock happens, the stock should be deposited into the Social Security Trust Fund, redeeming some of the special SocSec bonds that it now holds.  Then, it should be allocated to a sub-account within that trust, which allocates the entire pool of stock among all working Social Security account holders (I don’t know exactly how to do this, but I can envision something like a mutual fund holding just these 8 stocks–the allocation would be the hard part).  This would put the voting rights into the hands of private citizens and out of the clutches of political appointees.  It would require an act of Congress, maybe more than one.  Of course it wouldn’t be easy.

The advantages are obvious.  The Government stays out of the banking business, and the Social Security Trust Fund will be on track towards a solvency solution that doesn’t involve reduced benefits or higher taxes.

I have no illusions that anything like this will happen.  I don’t expect that it will be discussed in public.  I don’t even know for sure that I haven’t overlooked a big problem with it that would make it impossible.  But the fact that I can see it as a possibility, yet the people running things won’t even consider it if they do acknowledge the idea, makes me feel about as bad as anything else does these days.

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