Stop Socialism for the Rich: Nationalize Wall Street

03/18/2010 05:12 am ET | Updated May 25, 2011
  • Les Leopold Author, "Runaway Inequality: An Activist's Guide to Economic Justice"

Joe Biden's father had it right: "It's socialism for the rich and capitalism for the poor." How did we get here?

More than thirty years ago we embarked on a grand deregulatory experiment. The financial sector was unleashed from New Deal-era controls. We were told this would lead to great prosperity and that free free-markets would police themselves.

The experiment failed.

Instead, the big banks constructed the wildest casino in history, gambled with other peoples' money, walked off with fabulous riches, and pawned the losses on us. Not exactly Adam Smith's definition of capitalism.

The nineteen largest banks (which represent more than sixty percent of our banking system) wrecked our economy. They still are wrecking it. During the worst financial crash since 1929, many of them are recording record profits. With no sense of shame or even irony, they soon will dole out record bonuses while the BLS jobless rate (U6) hits 17.5 percent (the highest since the 1930s), and while 49 million Americans are skipping meals during this holiday season.

Wall Street created a series of (barely) lawful Ponzi schemes that stacked bets upon bets with no real assets in sight. Profits ran wild as phony assets inflated in value. The too-complex-to-understand financial innovations turned out to be toxic. When they burst, the real economy, the one most of us work and live in, was crushed. (See "Executives Kept Wealth as Firms Failed," New York Times )

Our elite banks still are not lending to job-creating businesses even after taking taxpayer bailouts valued somewhere between $1 trillion to $13 trillion in cash, loans, liquidity programs and asset guarantees. As Fed Chairman Ben Bernanke admitted, the largest banks are causing unemployment to rise by not lending out the capital we provided. We've had jobless recoveries before, but this our first jobloss recovery.

Instead, the largest financial institutions are playing the markets with our bailout funds and liquidity programs. They are gambling yet again by marketing high risk, high-fee securities. They also have a new toy: high speed trading. Each time, you or I buy or sell a stock, a big bank predator computer system is going to come in a nanosecond before our trade is completed to get a better price -- for the bank, not us. This creates zero economic value. It just transfers money from us to them in exchange for ... nothing.


When writing The Looting of America last fall I had offered a series of plausible reforms that I knew Wall Street would detest. But the crisis was so severe that for a moment it looked as if Congress and the administration would do the obvious: Install a sector-wide wage cap on financial salaries until unemployment went below 5 percent; Set a Tobin tax on speculative transactions; Place bans on derivatives that were too complicated to understand; End predatory mortgages; and Reinstate credit card interest rate ceilings to stop bank usury. I was naïve.

Instead, we have a Pay Czar who ignores the obscene bonus pools of Goldman Sachs, JP Morgan Chase and Morgan Stanley. Barney Frank refuses to ban complex, highly profitable, specialty derivatives. The Financial Consumer Protection Agency bill is being watered down, if not totally drowned, by bank lobbyists who are funded with our own TARP dollars. And the White House no longer even jaw-bones Wall Street's excesses. "Change we can believe in" has turned into "All retreat, All surrender."

Former Fed chief Paul Volker, however, won't quit. He is calling for the breakup of institutions that are too big to fail. Even Alan Greenspan agrees. While it would be enormously satisfying to bust up the big boys, it's not a panacea. As long as gambling is the bankers' way of life, a hundred smaller banks will continue the game as vigorously as nineteen large ones. As long as you can make more money by gambling than you can from loaning money to jobs-creating businesses, the net results will be the same.

Also smaller banks won't change the financial distortions of our economy. The financial sector as a whole is much too large and siphons off too much of our wealth, even when its bubbles aren't bursting. The entire sector is too big to fail and too big for the rest of us to succeed.

Decades ago, economists John Maynard Keynes and Hyman Minsky worried that large-scale private sector banking was inherently unstable -- that it would return to speculative activities as soon as the threat of collapse had passed. They wondered whether capitalism would have far fewer crises if the largest financial institutions were permanently nationalized.

They're winning me over. I no longer believe we can regulate our way out of this mess. I keep wondering how $100,000 a year civil servants are going to keep up with a $100 million dollar a year bankers, It's not going to happen. The bankers will use their army of financial engineers to outmaneuver the public regulators. Any regulator who can keep up with them will be sorely tempted to reach for the gold and jump ship. And this assumes that the regulations are tight, which they won't be because of the power and wealth of the bank lobby.

Instead, we should give strong consideration to nationalizing the nineteen largest banks in order to run them like public utilities. They could be modeled after non-profit credit unions and the few remaining state and regional banks. After nationalization, we also should consider placing banking employees into the civil service system in order to end the ridiculous wage distortions: Wall Street speculators should not earn one hundred times more than neurosurgeons.

Stable credit unions and regional banks could do an excellent job of moving savings to investment. It's painstaking, boring work and it will never produce super-profits. We don't need high stakes gambling. We don't need usurious credit card scams. We don't need subprime securitization and the stacks of bets upon them. We don't need high speed speculative trading activity that is just another form of outright cheating. And certainly, we don't need sky-high salaries for the croupiers.

(If you're worried that Wall Street would go in the red like the Post Office or Amtrak, do the math: It would take about a millennium of their red ink to add up to the trillions lost through the current banking crisis.)

Isn't this socialism? We've already established socialism for Wall Street's wealthy. We've allowed them to profit wildly from their fantasy finance bubble. We bailed them out when it burst. And after we emptied the treasury for their rescue, they are profiting wildly again. Is that capitalism?

We have to put our people to work. It's not going to happen through our Rube Goldberg regulatory contraptions now ricocheting through Congress. If we want to avoid a long, dark decade of joblessness, hunger and despair, we will need a renewed dialogue about what banks really are for, and how we get them to function for the pubic good.