What will happen the next time the largest banks in America gamble their way into chaos? Will taxpayers bail them out again or will the "stakeholders" be forced to make up the losses?
You put your money in a bank and you're a stakeholder. The Cyprus crisis demonstrates that top European officials are more than willing to snatch a percentage of investor deposits, even when those deposits are supposedly insured. Yes, the U.S. is not Cyprus. But, we can't dismiss the possibility that, should Wall Street take down the economy again (a near certainty), the idea of making all depositors take a haircut is not out of the question.
Imagine the following scenario: Wall Street banks find another wildly profitable, yet dangerous casino game (like high frequency trading or gambling on high risk credit derivatives using depositor money or money laundering or loan sharking or foreclosing on homeowners who are up-to-date on their payments -- wait they're doing all that already!) Before anyone notices, several too-big-to fail banks are on the verge of collapse. As the chain reaction sets off a major financial crisis, Washington attempts to rush to the rescue, yet again. However this time sentiment against another round of bailouts is so great that the bailouts don't materialize. It's not that hard to imagine the Federal Reserve and the FDIC declaring that all depositors must take a haircut along with other creditors. Tough love.
Or is it paranoia? Ellen Brown doesn't think so. She provides chapter and verse from a FDIC/Bank of England 2012 joint report that describes how depositors would be forced to have their accounts reduced in exchange for equity in the failed bank. (See "Think Your Money is Safe? Think Again: The Confiscation Scheme Planned for U.S. and U.K. Depositors")
There are alternatives:
Effective Regulation?: We could hope and pray that between now and then, regulation and enforcement would dramatically increase. But we might as well wish for the Tooth Fairy. My seat of the pants estimate is that it would require 70,000 additional regulators to effectively police the largest banks. What are the odds of funding and deploying such an army? Zilch.
Break up of the largest banks into smaller private banks?: "Returning to Glass-Steagall" is a popular refrain. But, we can't even get a watered down Volker rule implemented. Maybe another round of economic chaos will get it done? Maybe not.
Wait for the next crash?: Then we could demand the breakup of the large banks into smaller privately owned banks or nationalize them entirely. While I would greatly prefer the latter option, it seems immoral to base a reform strategy on waiting for massive unemployment to strike again. Millions are still without work due to the last crash.
That leaves one other sensible approach: Fight for public banking right now.
Let's not mince words. Public banks, whether in ultra conservative North Dakota or in China are socialist structures. The are owned and operated by the state in behalf of its citizens, at least in theory. There are no private shareholders. All profits go to the government or are reinvested by the public bank in behalf of consumers and businesses.
Brazil, Russia, India and China, which rely heavily on state-owned banks, also are countries that have weathered the financial crisis with the least amount of damage. (See Ellen Brown yet again: "Public Sector Banks: From Black Sheep to Global Leaders" for excellent data and analysis.) These countries recognize that their economies need public banks to assist development, rather than relying solely on predatory private banks.
A Red Bank in a Red State
The Bank of North Dakota (BND) is a remarkably successful example of socialist banking. More amazing still is that it thrives in a state where Democrats are almost as rare as windless days. You would expect that ultra conservative North Dakota would be the last place in America to support public banking. But you know, sometimes socialism really works. (See "Why Is Socialism Doing So Darn Well in Deep-Red North Dakota?" )
Established in 1919 by the Non Partisan League, a populist organization that gained control of the state legislature, the BND has become a fixture in North Dakota's economy. While Wall Street was on its knees begging for bailouts, the BND was turning a profit, year after year, for the people of North Dakota. It didn't get involved with sub-prime mortgages or derivatives. It didn't become a casino because none of its employees receive incentive pay for gambling with depositor money.
Check out the current salaries of the top 6 BND officers:
Eric Hardmeyer, President and CEO: $232,500.00
Bob Humann, Chief Lending Officer: $135,133.79
Tim Porter, Chief Administrative Officer: $122,533.95
Joe Herslip, Chief Business Officer: $105,000.00
Lori Leingang, Chief Administrative Officer: $105,000.00
Wally Erhardt, Director of Student Loans: $91,725.92
While these BND public bankers average salary is approximately $132,000 per year, the top five officers at Goldman Sachs average over $13.9 million each. So our illustrious private bankers "earned" over 105 times more than the top BND officers. You think they're 105 times more valuable to society? (For more information on financial inequality please see How to Earn a Million Dollars an Hour, Wiley, 2013)
A Public Banking movement builds in the U.S.
A collection of dedicated financial writers, public finance experts and former bankers have created the Public Banking Institute to help sell the idea of public banking to state legislators, the activist community and the public at large. Its president Ellen Brown (author of Web of Debt), and its executive director Marc Armstrong, are doing a remarkable job in helping various legislatures explore state-owned banks.
The Institute is holding a major conference on June 2-4 at Dominican University in San Rafael, Calif. featuring such anti-Wall Street crusaders as Matt Taibbi, Gar Alperowitz and Ellen Brown. Also speaking will be Brigitte Jonsdottir, a member of the Icelandic parliament.
Won't public banks would turn into piggy banks for ruthless politicians?
Some fear that politicians would use public banks to provide favors which in turn would lead to more votes and more favors. As economists Panicos Demetriades, Svetlana Andrianova, Anja Shortland, put it, this hypothesis also "postulates that politically motivated banks make bad lending decisions, resulting in non-performing loans, financial fragility and slower growth." ("There should be no rush to privatise government owned banks")
However, their research suggest strongly, that private banking is much more vulnerable to political corruption:
We suggest that politicians may actually prefer banks not to be in the public sector. . . . Conditions of weak corporate governance in banks provide fertile ground for quick enrichment for both bankers and politicians - at the expense ultimately of the taxpayer. In such circumstances politicians can offer bankers a system of weak regulation in exchange for party political contributions, positions on the boards of banks or lucrative consultancies. Activities that are more likely to provide both sides with quick returns are the more speculative ones, especially if they are sufficiently opaque as not to be well understood by the shareholders such as complex derivatives trading.
And let's not forget that the enormous salaries that drive private banking also make more than a few politicians and regulators drool at the prospect of moving from government to private banking. You can well imagine what that does to legislation and regulation.
In short, private banking is a veritable Petri dish for the germination of weak regulations, tax loopholes, lax enforcement and outright corruption..
And what about government owned banks? These economists report that:
Government owned banks, on the other hand, have less freedom to engage in speculative strategies that result in quick enrichment for bank insiders and politicians. Moreover, politicians tend to be held accountable for wrongdoings or bad management in the public sector but are typically only indirectly blamed, if at all, for the misdemeanours of private banks.... On the other hand, when it comes to banks that are in the public sector, democratic accountability of politicians is more likely to discourage them from engaging in speculation. In such banks, top managers are more likely to be compelled to focus on the more mundane job of financing real businesses and economic growth.
Wall Street's Counter Punch is Coming:
Wall Street is fully aware that the public banking moving is spreading. They know that the BND, precisely because it sits in such a red state, is a constant reminder that another, more sensible, and less lucrative path is both possible and desirable. Therefore, they're determined to snuff out this movement and their weapon of choice is the latest Pacific Rim trade treaty. Promoted by the Obama administration, this treaty is designed to help Wall street gain more access to foreign markets. Along the way, the closed-door negotiations may lead to language that will ban state banks.
Can the public banking movement turn into Occupy Wall Street 2.0?
We don't need to wait for the next crisis to undermine Wall Street's pernicious grip on our country. We can hit them where they live by building public banks in state after state. Here's why. Every time you pay any state or local tax or fee -- from sales taxes to fishing licenses, the money usually goes into a too-big-to-fail Wall Street bank. That's because most of the nation's 7,000 community banks are too small to provide the cash management services that state and the larger localities require. Add that up across the economy and we're talking $1 trillion in deposits that flow into Wall Street. But in North Dakota all the state revenues flow through its public bank. Imagine if the other 49 states formed public banks.
Also state banks like the BND can protect the states and municipalities from Wall Street firms that prey upon public entities that are desperate for funding. Wall Street banksters have a vast array of bonding schemes that earn them enormous fees at the expense of local taxpayers. Capital appreciate bonds, a Wall Street favorite, can lead to paybacks that are ten times the size of the original loan. (See investigative report here.) But not in North Dakota: the BND, not Wall Street schemers, provides much safer financing. After all its officers are not rewarded for ripping off their fellow residents.
Beating Wall Street back won't come easy. But it sure looks like the Public Banking Institute is lighting the way. They deserve the support of all of us who are sick and tired of Wall Street's greedy grip on our society.
Les Leopold is the Executive Director of the Labor Institute in New York, and author of How to Make a Million Dollars an Hour: Why Hedge Funds Get Away with Siphoning Off America's Wealth , (J. Wiley and Sons, 2013).
Follow Les Leopold on Twitter: www.twitter.com/les_leopold