The Change We Need I: A Bank for America

Nationalize the banks!

No, this is not the rallying cry of a new populist or socialist movement in the U.S. It is now the slogan of some Nobel prize-winning economists and respectable financiers. Even Alan Greenspan, anointed the "high priest of laissez-faire capitalism" by the Financial Times, has conceded the need for temporary government ownership of the nation's largest banks.

How far and fast we've traveled. Until just a few months ago, the belief that the government should not own any significant portion of the financial system was akin to a religious conviction in the U.S., even among liberals. There was only one god, the Market, and an entire priesthood, including members of some of our most important institutions -- the media, the universities, and our government itself -- preached its virtues and commanded us to obey.

This hitherto unassailable doctrine has suddenly become vulnerable as the Market turns against us with the kind of fury normally reserved for vengeful deities and forces of nature. Proposing nationalization, heresy earlier, is now commonplace. (1) Indeed the government has already been acquiring substantial equity in some of the nation's largest financial institutions, though it refuses to ask for real power over them in return. (2)

My aim here is not to address the details of the nationalization debate. Rather, I want to use the crisis in our financial system to pose a fundamental question about our political system.

Consider: What is democracy?

We normally think of democracy in terms of some essential, precious rights not available in any other political system, not the least of which are the right to vote that made Obama President, and the right to express ourselves freely on websites like this one.

But now we're compelled to ask: What does democracy mean when our lives can be so drastically affected by the Market, in which the most powerful players are people we haven't elected, and institutions in which most of us have little say?

When the Market, an entirely human creation, can ruin us as effectively as a hurricane, sweeping hundreds of thousands of us from our homes, destroying the livelihoods of millions more, and washing away the retirement security of an entire generation?

When the actions of organizations wholly unaccountable to us can imperil our public libraries, parks, fire departments, and schools? When many of our elected representatives have facilitated these actions instead of protecting our interests?

If there is a positive side to the financial crisis, it is this: We can no longer avoid confronting the limits of our democracy when our lives and communities are thrown into such violent disarray by individuals and organizations so completely outside our reckoning. (3)

It is this same crisis, moreover, that points the way toward a more complete democracy, one in which we will have greater control over the financial system. That is because the core of any government strategy to rescue this system will be -- and already has been -- a massive injection of our money into it.

If we're going to pay to save the financial system, we have the right to shape its future.

Banking and credit are the economy's air and water. They're too important to be left entirely to private operators whose only concern is maximizing short term profits. Yet even the most ardent mainstream proponents of nationalization assume that once this crisis passes, the government should, and will, re-privatize any financial institutions it takes over.

What then? What is to prevent these organizations from continuing to invent ever more destructive "financial weapons of mass destruction?" (4) Will they be any more accountable to us after the next cycle of boom, bubble and bust?

It is time we considered the possibility of permanent public ownership and control of a large part of the nation's system of savings and lending.

How might this work? One way is the creation of a national public bank along the lines of a credit union. Credit unions are owned not by shareholders but by their depositors, or members. We would own a national credit union in which all of us could be members.

A national credit union would combine our deposits into a huge pool of capital to lend, invest, and do all the other things banks do. Crucially, we would exercise far greater control over such a bank than we ever could over institutions like Bank of America. Credit union members vote for their board of directors. Unlike private banks, in which the greatest influence is exercised by those with the largest number of shares, every member enjoys the same voice in a credit union -- one depositor, one vote.

Would a national credit union be competitive with large private banks? Like existing credit unions, it would return profits directly to us in the form of favorable interest rates for loans and deposits. For example the typical yield on certificates of deposit at the largest credit union in my area is about one percent higher than Bank of America's, and the yield on its best checking account is over 4%, compared to less than 1% for BoA. (5)

A national bank structured along these lines may also be safer than large private banks. Credit union managers are salaried employees who earn wage increases rather than exorbitant bonuses for good performance, which reduces their incentive to take wild risks with members' money. This would not by itself guarantee the stability of a national credit union, but its managers and directors would at least be accountable to us if things went wrong.

This is just one way the government could use our money to create a national public bank; there are other possibilities. (6) Whatever its specific form, a permanent national bank could compete with private banks and demonstrate the benefits of a financial institution owned by, and accountable to, the people.

At stake here is not solely or even most importantly the stability of our banks; rather, it is the very character of our democracy. A large, public financial sector could be a critical piece of a new democracy in which we cannot be held hostage by organizations over which we have no control. In this new democracy, the heresy would be not the notion of public ownership of financial institutions, but rather the idea that these institutions should exert so much power over our lives without being accountable to us.

Let us use this crisis to move ourselves in the direction of such a democracy. Let us demand that the government use our money not merely to bail out Bank of America but to create a new Bank for America.

NOTES

1. The indispensable Baseline Scenario sums it up thus: "financial elite solidarity has broken..."nationalization" is no longer taboo. The consensus is dead." Here's a list of luminaries on both sides of the nationalization question. Alan Greenspan announced his temporary conversion in an interview with the Financial Times. The president of the Federal Reserve Bank of Kansas City, Thomas Hoenig, is apparently in favor of temporary nationalization. James Kwak at Baseline has an excellent summary of the different definitions of nationalization.

2. Follow the money at ProPublica. Baseline criticizes the timidity of the bailout to date , and Paul Krugman protests its deference to banking insiders.

3. Simon Johnson, ex-chief economist at the IMF and currently at the MIT Sloan School of Management, has been one of the few mainstream commentators to correctly identify the financial meltdown as not just an economic crisis but a deeply political one. "This is, after all, a critical fight to save American democracy, and it's good to know what we are up against."

4. This is the now famous formulation of Warren Buffett in his 2002 letter to investors in his mutual fund (p. 15).

5. One reason this credit union may be able to offer better rates is that membership in it is open only to employees of the local educational institutions. This may be a more stable base of depositors than most private banks like BoA, and translate into better rates. This could be a problem for a large national bank open to all.

6. Gerald Epstein, an economist at the University of Massachusetts-Amherst, advocates a reversal of the proposal that the government should detoxify bank balance sheets by buying their bad assets. "A much better approach is to turn the formula on its head. Let the taxpayers keep the good banks and leave the bad ones for the bankers...And the bankers will have to deal with their own mess, rather than foisting it off on the rest of us." With the new good banks, the government could create "a completely different banking environment, one with a completely different mandate and incentives" and considerably greater public accountability.

Comments

[Enzo]

Excellent article, Sanjiv! Truly excellent!

[Jachyra]

Ummm.. I'm pretty sure we've already tried this idea before... Have you ever heard of the First Bank of the United States? Have you ever heard of the Second Bank of the United States?

And what exactly has the government done so well that makes you think that they'd actually do any better at running a bank? Or better at running anything for that matter?

[research]

compared to the Banksters???

Democracy, the worst form of organization except all the others.

Corporatism sucks.

[research]

Just put the FED under treasury control where the constitution says it belongs.

Control the Money, control the world.

" I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson, (Attributed)
3rd president of US (1743 - 1826)

[dgscol]

The situation is worse than the BofA. As American descends into debt, we may have to turn to the International Banking system totally outside the US. They have established an International currency based on gold held by the IMF, and this already trades for Federal reserve notes since 1964.

IF we must make a move in this direction banking and our national currency will again be linked to gold prices, and be controlled by groups entirely divorced from our laws and institutions.

[fisharefreinds]

A national bank? I don't think that is such a good idea, isn't that what Aaron Burr wanted or was it Hamilton? and they tried to kill each other. Anyway, I thought the Federal Reserve (our nemesis) took over that function and our "Depressio­nScholar--­Bernacke" is presently making every effort to lead us into a horrible one....
By the way, Bank of America annouced that it is preparing to send 25% of its work force to India today!
All that money we gave them and goodbye jobs, Ta Ta!

[Jachyra]

Well you sort of have to make up your mind.... do you want them to keep their costs as low as possible so that they can make as much money as possible as quickly as possible so that they can pay the taxpayer back as soon as possible? Or do you want them to not worry about lowering their costs and not worry about making as much money as quickly as possible and take their time paying the taxpayer back? I don't blame the banks for being confused about what the taxpayer wants them to do -- I'm pretty confused about what the taxpayer wants them to do.

[fisharefreinds]

Your joking right? After all this country has been through with job loses and the shift to India and China markets, what does this have to do with repayment? We will never see a dime of that money and you know it, this is not the S & L crisis of the the 80's, but much much worse! You don't know what people want? Have you been to a job interview lately?
Are you for real? Keep costs low? Crap! We don't benefit; it just gives the Corporation greater profit margins and we pay the same--18 to 30% interests don't change!
The taxpayer has no say, our congress is fixed. It's all being moved and taken apart and moved to the East or out.

[WASanford]

Sanjiv, this is an excellent idea but this is not the first time I've seen it. In the early 1800's the city of Philadelphia had it's own bank. It offered loans to its citizens at low interest rates and its earnings were such that the city had no need to tax its citizens. Also, the state of North Dakota has its own bank and is also beneficial to its citizens.

Ellen Brown is promoting the establishment of a government operated federal bank at her blog http://webofdebt.wordpress.com/. She writes an analysis of the Wizard Of Oz in the first chapter of her book "The Web Of Debt." which should be required reading.

There is nothing stopping municipalities, counties, or states from establishing these banks. States that find their budgets out of balance can find salvation for their budgets and for their citizens in establishing their own publicly owned banks.

We deserve to experience a change for the better through this debacle that was caused by irrational greed. One of those changes would be publicly owned banks.

[Sanjiv Gupta - Huffpost Blogger]

Thanks for reading, and for the additional references, which I'm adding to my reading list. We need a systematic economic history of public/government banks in the US and other developed countries. I'm sure these exist--more research to do in all my spare time!

[jsarets]

You're on the right track, but we don't want one national credit union.

The best part about credit unions is that they are self-selecting democratic constituencies. This means that members have two ways to influence collective investment: we can vote in board election, and we can deposit our wealth at the credit union(s) of our choice.

The ability to choose our own constituencies instead of being forcibly bound to gerrymandered geographic constituencies is crucially important to promoting non-coercive cooperation in society.

The difference between progressive participatory democracy and oppressive state socialism is decentralization and freedom of choice.

The spontaneous self-organization of cooperative communities by free association on the Internet is a remarkable window into the natural structure of modern society in the absence of legacy institutions.

The natural power structure of "information man", as opposed to "petroleum man", is a form of libertarian socialism that is as individualist as it is collectivist:

Mutualism.

[Sanjiv Gupta - Huffpost Blogger]

Thanks for the thoughtful, and thought-provoking, comment. I can see that there's something menacing about the idea of a large, national public bank to which everyone could belong. However, there'd be nothing stopping people from taking their money elsewhere, so long as private banks big and small continued to exist. And consider the benefits of scale--imagine 50 or 100 million depositors voting to shave 0.10 percent off the yield on their CD's to invest in alternative energy (in return for a share of any resulting profits, of course). I do appreciate the spirit of your comment about self organization and free association on the Internet; it does seem to point the way towards a higher stage of democracy.

[Henry]

"Consider: What is democracy?"

Democracy is when the rights of the citizen are superior to the rights of the govt. Emenent Domain is a special exception. A taking by the government requires a fair compensation unless a particular state of emergency is declared. I listened to Bernanke state that the big banks (all) are adequately capitalized. What seems to be the problem???

[KillTheMessenger]

Too much self-loathing here. I certainly haven't been affected that much by the market. I don't think that cutting back a little bit and focusing on the real stuff instead of steady "wealth-creation" is bad for us. It might be "un-American", but I would know nothing about that since I have not been promised to be a millionaire by my 30th birthday at either my birth or by any constitution I was ever living under.

[Sundialsvc4]

Certainly, Sanjiv, while your well-reasoned and researched perspective must be seriously considered, I'm still nervous about "public ownership of" the institution on a permanent basis. Perhaps another way to put is is, "does anyone really want to own these institutions in their present form?" "Should they be in their present form?" I think not.

The greatest power of, and I think the most-important role of, "government" is "regulation" ... not being the ultimate pool of capitalization. While the present circumstances have rewarded us with several dozen utterly-criminal and utterly-insolvent banks (an obvious crash-and-burn failure), I'm not yet convinced that "we have no choice but to own something" in order to set limits upon its course and to thereby ensure that it remains in keeping with the public's interest. But I also have not yet followed-up on the various citations in this well-written and thought provoking piece.

[WASanford]

Get over your fear of a publicly owned bank, it's been done, it works, and it's beneficial to those who own it. That would be us, the citizens.

[Sanjiv Gupta - Huffpost Blogger]

Thanks for reading, and for your feedback! Wholly or partially nationalized banks have a spotty history, so the idea of public ownership of large financial institutions understandably creates anxiety. However, it's not clear to me that regulation will ever be able to keep pace with financial wizardry (some of it quite valuable). See the very sobering "Looting of America's coffers" by David Leonhardt http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html, and recent research on SEC regulation reported at Baseline Scenario http://baselinescenario.com/2009/03/12/sec-fraud-enforcement-bernie-madoff-allen-stanford/.

[JScott]

Or the other take of this that Sheila Bair noted that financial institutions should not be allowed to become so large as to become too large to fail so that if they do it won't lead to a system wide (aka world wide) economic and financial meltdown.

[AdamMarx]

The question of "affiliation" needs to be sorted out in any expansion. In other words, what problems emerge in "scaling" a credit union? Credit Unions may do better with subprime lending given that "affiliation" factor (there may be some evidence of this), but if it scales to anonymity we probably have the moral hazard again (i.e.---the percent of agents defaulting). Credit unions do solve part of the principal-agent (in that everyone is an owner). So -- the question remains: how to solve the affiliation problem at a "national" or even "town" level? Does scaling bring back all the forms of market failure (adverse selection, moral hazard, principal agent) that created the current mess?
The broader problem is beyond the "loans" that are the domain of credit unions. In the current system bad loans moved through the financial system as securitized mortgages. There it became part of everything financial. And that is the realm of 401(k)s and people's future---credit unions can't, it seems, generate the kind of profits to finance people's retirement (at least not in the current configuration)
Currently, worldwide they control about $1 trillion. The US has the largest number of unions (about 9000). Maybe a credit union mortgage-backed security? It could bring more liquidity to credit unions who could then provide loans to businesses and shift to a form of investment banking. But that also increases the risk and, again, the matter of affiliation becomes more important to prevent potential market failure.

[Sanjiv Gupta - Huffpost Blogger]

Thanks for the thoughtful comment, on this and on an earlier post. The scaling issue is fundamental for any national bank/credit union, not only for the reasons you mention, but also because it's not clear how to scale up the filters that many credit unions and smaller banks apply to their loans and deposits. These may make them more stable but also less open. All that to say that a national public bank won't be a magic bullet; however, it's something we should start thinking about. As for your observation about retirement, I agree--we need to figure out an independent way to guarantee retirement. Check out Dean Baker's testimony to the House: http://www.cepr.net/index.php/publications/reports/testimony-of-dean-baker-before-the-house-committee-on-education-and-labor/

[brodix]

Banks used to issue their own currency, but with the current system, we have a publicly supported currency and a private banking system. There are several issues here. For one thing, money does replace people's trust in one another and while this has its advantages, it also has disadvantages. If we were to understand that money is another form of public utility, like a road system, we would understand its value and necessity, but we wouldn't necessarily drain value out of our communities and environment to put into a bank. This would create a far more organic economy, that would encourage various forms of exchange. I think banks should be a natural function of government, such that as any incorporated township, county, state, city, etc. would as naturally have a banking system, as it would an administration, court, police, etc. If individual people wanted to set up private banks, they could but would be subject to the regulation of whomever's currency they wish to deal in. They might issue their own, or join a local system, otherwise the rules of the national currency would apply. The possibilities are numerous and the more effective methods will rise to the surface and the less effective ones will adjust.