Let's Buy a Bank

With the disastrous market reaction to his last bailout plan, Hank Paulson is now preparing to ratchet up the rescue by pouring capital into frightened financial institutions in return for equity shares. The intent is to sell back the shares as soon as the firms get back on their feet. Not so fast. The US government should buy and keep outright ownership of at least one major bank to in order to have a window into the innards of the financial system without which effective regulation is impossible.

The Treasury has announced it is outsourcing most of the management of the $700 billion package to big Wall Street firms. As galling as it is to see the arsonists put in charge of the fire department, there is little alternative.

Two decades of systematic privatization and deregulation has depleted and demoralized the civil service to the point where the government does not have the in-house capacity to do the job. In 1992 there were some 20,000 federal employees -- lawyers, economists, auditors, etc -- working on regulatory oversight. By 2006, after the huge expansion and increased complexity of financial markets, there were about 14,000. In 2004, the Securities and Exchange Commission allowed investment banks to operate with fewer reserves against potential losses, promising to strictly monitor their behavior. The SEC, according to the New York Times, set up an office with exactly seven people to oversee a $4 trillion market.

But even with more people, the government cannot effective regulate from outside the vastly complex and opaque world of modern finance. When the Bush regulators (yes, I know, an oxymoron) finally began to smell smoke last year, the agency staffs were completely mystified as what had been going on. Not only did they not know where the financial bodies -- the rotten mortgages, the disappeared collateral, and the bogus guarantees -- were buried, but they did not have any idea how they disappeared and who was next. All their information came, and still comes from, the banks and brokers themselves, whose lies and mutual deceptions had fueled the overheated markets in the first place. As a result, the government has consistently underestimated the seriousness of the crisis. One reason the markets have not responded to the Treasury bailout and the Federal Reserve's guarantee of the commercial credit market is that investors are not convinced that these agencies know any more than they do.

So, on the desperate theory that it takes one to know one, the Treasury has now turned to the criminal class itself to ferret out the real value from the wreckage of financial assets and hope that self-dealing and fraud are kept to a minimum. Good luck.

The manipulation of the finances of electric utilities was a prime cause of the crash of 1929 that led to the great depression. Out of those scandals came the idea of having publicly owned utilities -- the Tennessee Valley Authority was the prime federal model -- as a "benchmark" so the government could judge and monitor the performance of investor-owned utilities. Even with the massive privatization of the energy sector, states like California still use their public utilities that way.

A federal bank could perform a similar function. Operating every day in the credit markets, it would be a real world window on what it going on. Because of its public nature the government bank would be transparent and its executives would be paid modestly and on salary, rather than the bonus system that encourages short-term recklessness. Perhaps most important, it would be a training ground for the new era of high quality, dedicated public servants that are absolutely necessary if we are going to avoid repeating this disaster.

Yes, the bank will be more bureaucratic -- cautious, less "innovative", less likely to take risks. It would therefore a model of what banks and bankers used to be before they became macho masters of the financial universe -- or what's left of it.

Jeff Faux was founder, and is now Distinguished Fellow, of the Economic Policy Institute. His latest book is The Global Class War.

Comments

[PT6]

This is a great IDEA and we can use that to steer away from Future Corruption!

If Market Rebounds which it should do now that the WORLD HAS BAILED OUT ALL THE CORRUPT BANKS Obama should Benefit!

Repubs think this Market Rally is the "October Surprise" Repubs always "jack up" the market during voting season to give themselves a boost!

Certainly, we must make the Point that "MASSIVE COSTS for this BOOST IS BORN BY THE TAXPAYER and MIDDLE CLASS! Demos must "take full credit for any improvements in the market" as we have supported the Bailout at a much higher percentage than the Repubs did.

However, we must be cautious if it continues or watchful if it tanks again to make sure we are supportive.

A sustained run is a benefit for Democrats more than the Repubs. Democrats be clear this is what we hoped to achieve!

We must point out that just because Wall Street may be happy that does not translate to Main Street and McCain is NOT TRYING any more than BUSH to help Middle Class America.

Reform of Washington and Wall Street can not be left in the Hands of the people WHO COST Americans Trillions of dollars for a "FAKE WAR" and a "FINANCIAL CRISIS" like the Great Depression.

Remind Americans they lost $2000 in income under Repubs while gaining $7,500 under Democrats.

Also, Wall Street tends to do better under Democrats than Repubs.

[Chicagowill]

As Joe Biden said, "Where do I start?" You nailed the issue early on. We cut and demoralized the bureaucracy and couldn't control the result. If we collected required data and had a well-paid bureaucracy interpret it and take action, we could avoid many of the issues you state. We don't need to own a bank. Also, the Fed is not the issue. The free market ideologues have made government service pay so poorly they cannot keep the smartest people. They go to Wall Street.

Let the regulators enforce the regulations we have today. Let people who understand why we implemented these regulations lead them, not people who believe the regulations exist to be enforced, not circumvented. Then the private sector banking system could do what their federal charters asked them to do.

BTW, we used to have a nationalized bank. It was the Postal Savings Bank. I collected their stamps as a child. Many other countries use them to collect savings and fund the national debt. It's not good or bad, but this is not a new idea.

[SeriousBlack]

Great idea. Unfortunately, it makes too much sense and would never be done.

Says the cynical side of me. Mr. Faux, once Barack Obama is elected president and his Secretary of the Treasury is appointed, you should at least try to communicate this idea directly to him.

[Freedomfest]

The Federal Reserve is Guilty of Helping Create the Global Financial Meltdown

Show your outrage at what the Federal Reserve has done to the American economy
with their easy money policies which caused the credit & real estate bubble and subsequent global financial meltdown.

Join the thousands who are signing & commenting on the Abolish the Federal Reserve Petition at http://www.petitiononline.com/fed/petition.html

[avraamjack]

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Lending to the unqualified, securitizing mortgages doomed to fail and insuring securities doomed to fail caused the meltdown.
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The FED did none of this. Deregulation is the culprit.
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Who promoted deregulation?
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Long term federal policy promoted housing with excessive tax breaks. Housing should never exceed ability to pay because it is too closely tied to quality of life.
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[ianrthorpe]

Jeff,
Why buy, In Iceland they are giving the things away. Buy a dozen herrings you get a free bank.

http://greenteeth.blog.co.uk/2008/10/12/how-didicelandgo-bankrupt-a-boggart-wickedpedia-explainer-4859215

[jsarets]

A public commercial bank that holds itself to higher standards won't be able to compete.

Regardless of how transparently and responsibly it operates, we don't want the federal government making direct loans to businesses and individuals. If we have a federal bank -- and I believe we should -- it must be a central bank that only manages deposits and loans with state banks, which in turn only deal with local banks.

In other words, we don't want to buy Bank of America and change as little about the business model as we would about the name. What we want to do is revoke the charter of the Federal Reserve and return its control of macro-monetary policy to federal government as the Founders intended.

Here's how it works:

First, Congress authorizes the Treasury to buy and retire all outstanding Treasury bonds, commercial paper, and mortgages on the open market within 2 years using interest-free fiat currency notes as authorized in Article 1 Section 8 of the Constitution. Meanwhile, regulators steadily increase the required fractional reserve ratio to 100% over this period as the new Treasury bills are deposited.

When the process is finished, the entire national debt would be eliminated, the supply of interest-bearing Federal Reserve notes would be completely replaced by interest-free Treasury notes, and the crushing yoke of debt slavery would be lifted from society -- with little to no inflation.

Can we sell that?

[Erdgeist]

Jeff, love the idea. Let's do it. Eliminate the middle-man. We go directly to the Federal American Bank (FAB) run by a dedicated bureaucracy who have no reason to think up exotic instruments, or embezzle. Ben Bernanke will be a cheap CEO too, he only makes about 200K a year. Does he get manicures?

[Antifascist-08]

Does anyone besides me want to have a thorough discussion of the pros and cons of a national banking system? One bank isn't going to do it.

Why not think bigger.

[avraamjack]

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We would have a parallel national banking system if the .7 trillion were used to create 20 banks.
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All you need to create a bank is some office space and some executives. Iceland just created a new bank to take over.
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This would have an immediate effect upon credit availability. All the execs would have to do is call the car manufacturers and other credit consumers and let them know money is available.
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Buying bad debt or even direct infusions of capital are much slower because they still have to convince the scared managment of a bank to lend.
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A new bank with a 35 billion credit line at a very low rate and no debt will be eager to lend.
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The stock, some or all, could be sold to the public in a few years.
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[KillTheMessenger]

Just because you have a new bank that can create more debt than all other banks together does not mean that you have solved a crisis that was created by creating too much debt.

If that was the case, the cure for cancer would be to implant more cancerous tissue into a patient's body.

[avraamjack]

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You would solve the crisis of a lack of credit availability for qualified borrowers.
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[KillTheMessenger]

To every problem there is a solution that is simple, obvious and... wrong.

:-)

[Minotaurus]

A Federal Bank in USA would be a great idea for the new age homeowner especially.
An International Federal Bank would be better: like a " new age IMF for all ".
But nothing can save the world of miserly cash hoarders or piggy cash keepers who's afraid of showing their tons of dirty cash in times like this because someone might point the finger at them as:"here are those 10 trillion dollars",the: "10 trillion dollars that have stopped flowing in the market"!
The kind of people that stopped the cash flow in this world has to be the ones that got it all locked up somewhere?....,but nobody knows who they are yet?....Time will reveal them to us.
Federal Banks can help the cash flow and restart credit and eventually progress with the world in the new age in which they will be needed in order to stop the greed.

[EricPrentis]

What is ailing the markets is that there is no confidence in Treasury Secretary Paulson and his other Goldman Sachs" buddies to fairly implement the $700 billion dollar financial rescue package. Paulson held a press conference Thursday to cover his butt by declaring that he couldn"t guarantee that his efforts would do any good. That is because he knows his only goal is to protect his pals, the crooks on Wall Street. Lets not waste good money on bad people, choose someone new to manage the bailout, someone Americans can trust. Paulson and his cronies must go.

[Soulsurfer]

Agreed. This has been going on too long, regulatory agencies run by insiders of the industry they're policing. Ridiculous.

[avraamjack]

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Many wonderful ideas.
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Bonuses can be generous, but they should be based on long term performance. Perhaps one tenth of the bonus should be paid for ten years, as long as profit does not diminish?
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In terms of the government owning banks, would it not be most effective and palatable for the government to create new banks instead of supporting moribund banks? Iceland just took that approach.
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In 5 years, most or all of the stock could be sold to the public.
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[Antifascist-08]

Yes.

Why don't we go to this system? Couldn't it be set up to protect and serve the people of this country?

At this moment in time, if we don't change our economy to get us off the oil habit, when are we going to do it. There is ONLY ONE WAY to reduce our dependence on foreign oil, and it is NOT DRILLING. We need to integrate everything we do in the next ten years towards alternate power sources. That would solve a lot of economic woes right there.

Everything should be pointed toward that goal. Infrastructure, development of renewable fuels and resourches all fit into a more stable economy and lots more jobs that will stay here.

Obama's economic plan is a great place to start because his tax plans AND his economic and social service plans fit right together, but we should go further. Check this link about solar potential. Its whole plan with lots of research done.

http://www.sciam.com/article.cfm?id=a-solar-grand-plan

A national banking system would make this possible right away.

[avraamjack]

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Thank you for agreeing.
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I do not like the creeping fascism either.
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[JPHR]

The problem with the investment bank brokerages was the same as with Enron. Enron was both market and counter party. All those deal should go through a fully regulated exchange instead and not unregulated over the counter. OTC gives a broker to be both counter party and market, which tends to create an opaque mess as proven once again now. The exchange through margin calls and also in case of default as an insurance mechanism will bring this whole opaque transaction mess to an end. Instead of difficult counter party risk you have automatic insurance from the exchange. Exactly the risk of difficult to estimate counter party risk is causing the credit freeze (no interbank lending).

The US has always been very firm to prescribe an IMF recipe to countries in difficulty. Ironic that it now wants to avoid that same recipe at all cost?

[nezumi]

I think that the gov should not only take control of one bank but of all ailing institutions. Isn't that the principle of free markets?

When you save a doomed company by investing money, usually you get to call the shots. And the taxpayer is only likely to see some of the money back, when the stake of the gov is sold on again. However a stake without rights to vote is much less worth to other investors. So, to make the most out of taxpayers money, the ailing banks should be nationalized. This does not mean the gov has to actually run them. This only means it will reap the profits when the mess is over. And it would give a better control against fraud.

[dshwa]

That's what we did in the great depression, eventually reselling them for a profit.

[Antifascist-08]

Exactly.

[KillTheMessenger]

So you keep a bank. What are you going to learn? You are going to learn how your own bank operates and you will still know close to nothing about what the other banks do.