What is it that a bank really does? In college, many decades ago, I was taught that banks served to bundle many small investments to make them available for investors to create productive businesses. More recently, the idea became popular that banks specialized in accumulating information that made them ideally suited to determine which investment projects would be viable and which would lack merit. Of course, with the demise of Glass-Steagall, banks did accumulate massive amounts of information -- especially when the same company ran a person's bank, stockbroker, insurance company, and credit card. But that kind of information is something entirely different.
By the time this new idea of banks as information specialists became widely accepted, the business of lending to large corporations was shrinking. Large corporations were able to finance themselves by borrowing directly in the commercial paper market. To compensate for this lost business, banks began to see their future in collecting -- organizing mergers and acquisitions, bundling financial investments in novel ways, and, on the retail side, late fees from unwary customers. And yes, bundling subprime loans. Is any public purpose served by slicing and dicing financial paper?
We all know that until recently they were very successful, but the question is whether their success reflected any public purpose. We now know that the financial system was not particularly efficient in gathering information. If it was, TARP would not exist.
Why couldn't banks be more like a public utility, as they were supposed to be in the age of Glass-Steagall? Just as a public utility sends water or electricity to where it is needed, public banks could run checking accounts for the public, paying bills and accepting deposits.