State banks would mean jobs, credit and investment: Why don’t we?

One of the many problems with the current banking system is that your tax money helps fuel speculation. Unless there is a public bank that your local government can place deposits into, revenues are the playthings of big banks.

Some of that money will go toward investment via loans — at a hefty profit to the bank, of course — but a significant portion will go toward risky, socially harmful speculation. What if these public funds were instead put in a professionally run public bank? There would be more funds available for investment, significant savings on interest costs and more jobs would be created. That is the conclusion of a series of studies examining the issue.

The latest of these studies advocates that a Vermont state-government agency be converted into a state bank, run along the lines of the Bank of North Dakota, the only state bank in the United States. This study, prepared by researchers at the universities of Vermont and Massachusetts for the coalition group Vermonters for a New Economy, concludes that a Vermont public state bank would lead to more than 2,000 new jobs, hundreds of millions of dollars in increased economic output and a significant increase in funds available for investment.

Vermont maple syrup (photo by Gerald Zojer)

Vermont maple syrup (photo by Gerald Zojer)

Earlier, separate studies concluded that state banks in Oregon and Washington state would lead to thousands of jobs and hundreds of millions of new revenue. Advocates of a state bank in California believe the creation of a public bank would lead to billions of dollars in benefits there. The Bank of North Dakota turns a profit on behalf of that state’s government while providing investments for local projects — an example that could be replicated elsewhere.

Vermont has a small population similar to North Dakota’s, and the researchers who prepared the Vermonters for a New Economy paper drew on North Dakota’s experience. The paper concludes that a Vermont state bank would result in:

  • 2,535 new jobs, including more than 1,000 in the first two years.
  • $192 million added to the state economy.
  • As much as $236 million in new money would be available for credit.
  • Savings of almost $100 million from reduced interest costs.

If it acts like a bank, why not make it a bank?

Such achievements would represent a considerable benefit for a small, rural state with 600,000 residents. The paper does not recommend that Vermont start a state bank from scratch, but rather convert an existing state agency, the Vermont Economic Development Authority, into one. The paper said the authority, in conjunction with two other state agencies that provide specialized loans, already carries out many of the functions of a bank. The authority is tasked with “providing loans and other financial support to eligible and qualified Vermont industrial, commercial and agricultural enterprises” by the state legislature, a mission similar to a state bank.

As of now, the Vermont state government deposits its revenues in two commercial banks, TD Bank (based in Toronto) and People’s United Bank (a regional bank based in Connecticut that swallowed a local bank previously used). Those two banks can, and do, use the money deposited by the Vermont government for any purpose its managers desire. Although the paper went out of its way to praise both for their willingness to lend locally, they have little obligation to do so. TD Bank, typical of large financial institutions, is heavily involved in speculation — it has a reported derivatives exposure of $3.8 trillion, a total more than four times more than its assets. There is risk here.

Were the state government to instead place its revenue in a state bank, all the funds (excepting those required to be held as reserves under applicable federal regulations) would be available for local investment, both as loans and for needed public infrastructure projects. Moreover, a state bank could borrow funds from the Federal Reserve at a much lower rate than by borrowing from a commercial bank and, by being able to use funds from its state bank, the government would float fewer bonds, saving on interest payments. The paper said:

“A public bank could direct as much credit as desired within fed reserve requirements, capital ratios, and prudent banking towards investment in-state lending agencies by partnering with them. A bank can also expand the amount of credit available through leveraging, which the [state] Treasurer and lending agencies cannot do.” [pages 10-11]

The paper calculates that, even with reserve requirements, there would be more than $200 million in new credit available, which could be directed toward useful investment rather than speculation. Because Vermont’s deposited revenue represents a minuscule percentage of TD and People’s United’s assets, and because a state bank would be much more focused on public needs, the proposed state bank’s credit would be in addition to, not a replacement for, commercial banking credit:

“[O]n the question of a public bank creating new credit or not, we find no evidence to support critics, and find that public bank lending will mostly add to existing credit within the state. Furthermore, even if public bank lending simply replaced existing lending by private banks, the results would still be highly beneficial.” [page 22]

What’s good for a small state is good for a bigger state

In addition to the other benefits, the profits from loans would be returned to the state. The Bank of North Dakota routinely produces profits for that state’s government while providing a reliable source of funding for local investment. There have been bills introduced into the Vermont Legislature to study the creation of a state bank, but so far have not advanced due to opposition by the Vermont Bankers Association.

Similar bills have been introduced in other states, which have also faced considerable headwinds, despite (or because of) similar conclusions.

A study by the Center for State Innovation found that a state bank in Oregon could help create or retain 6,900 to 8,800 additional small-business jobs, make $1.3 billion available in new credit and earn profits for the state after only three years. Another study by the same organization focusing on Washington state predicted that a state bank there would created as many as 10,000 small-business jobs, make $2.6 billion available in new credit and also begin turning a profit after three years.

Advocates of a California state bank believe that it would generate $133 billion in credit becoming available for the largest U.S. state. A bill to study this issue was passed by the state legislature, but was vetoed by Governor Jerry Brown. The Bank of North Dakota reported net income of $82 million in 2012 — what would such a bank return in bigger states?

Ultimately, however, the stranglehold of financiers can not be reformed away. It can only be eliminated by converting all banking into a public utility for the broad benefit of society with speculation firmly prohibited.

Getting to there from here is a long road, but successful public state, provincial and regional banks replicated around the world would set a good example, and demonstrate that the staggering cost of a financial industry that continues to run amok is not a burden that we are forced to live with. If we have no control over the economy and our working lives, democracy is an illusion.

Grip of giant banks on the economy stronger than ever

“Too big to fail” banks are bigger than ever. Holding the global economy hostage, extracting profits from every aspect of human activity and remaining well above the reach of the law are simply business as usual — not to mention extremely profitable.

The six largest banks in the United States — each among the world’s largest — reported composite net income of $91 billion for 2013. Yep: $91 billion in cold cash, for only six enterprises, and that total is the profit after paying out their colossal salaries and bonuses.

Wells Fargo Plaza, HoustonTo put the total in further perspective, the six banks enjoyed a profit margin of 19.1 percent. By way of comparison, the average corporate profit margin in mid-2013 was 9.3 percent. It would seem that financiers have managed to trudge on despite suffering the critiques of people who refuse to believe that their multimillion-dollar compensation is a God-given right.

No less than an authority than Gregory Mankiw says that’s so. Professor Mankiw was the chair of the council of economic advisers under former U.S. President George W. Bush and is currently the head of the economics department at Harvard University. But if you are expecting scholarship from someone with such credentials, you will be disappointed. For example, he wrote in his paper, “Defending the One Percent”:

“Those who work in commercial banks, investment banks, hedge funds and other financial firms are in charge of allocating capital and risk, as well as providing liquidity. They decide, in a decentralized and competitive way, which firms and industries need to shrink and which will be encouraged to grow. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to this activity.”

So there you have it: Financiers do not self-select on the basis of lust for money without regard for the damage they do to others, but are anointed by society. Do you recall a referendum selecting them? I do not, either.

Accountability? How quaint!

Opportunities for upward flow of money were not in short supply last year. Here are the 2013 full-year results for the six largest banks, as reported by the companies themselves last week:

• JPMorgan Chase & Co.: net income of $17.9 billion on revenue of $96.6 billion. That was JPMorgan’s profit after setting aside $8.7 billion to cover legal expenses.
• Bank of America Corp.: net income of $11.4 billion on revenue of $89.8 billion.
• Citigroup Inc.: net income of $13.9 billion on revenue of $76.4 billion. Although Citigroup’s 2013 net income was close to double that of 2012, it was nonetheless considered disappointing! Not even Citigroup is immune from the pitiless system it and its peer institutions have created. Its stock price has dropped several points since last week, meaning the market is demanding it squeeze out more profits.
• Wells Fargo & Co.: net income of $21.9 billion on revenue of $83.8 billion.
• The Goldman Sachs Group Inc.: net income of $8.0 billion on revenue of $34.2 billion. Those profits are after compensation and benefits totaling $12.6 billion. The average compensation for a Goldman Sachs employee for 2013 was $383,000, lower than the $399,000 of 2012. Oh the humanity!
• Morgan Stanley: net income of $17.9 billion on revenue of $96.6 billion.

How big are these six banks? So big that they hold 67 percent of all the assets in the U.S. financial system, considerably more than they held five years ago.

Cause the crash and then profit from it

And what “services” do these too-big-to-fail financial institutions provide? Matt Taibbi, in the Rolling Stone article that gave Goldman Sachs the memorable moniker of “vampire squid,” summarized:

“Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest.”

Goldman Sachs and its peer intitutions seek to extract money from every aspect of human activity. These, and other banks, have never had to accept responsibility for bringing down the world’s economy. Other than a few individuals who have been hauled into court because their scheming was too blatant to ignore (who are always tagged “rogue traders” as if they don’t operate within a well-established system), it’s business as usual.

Why should the we be at the mercy of a tiny elite that knows no limits to its rapaciousness? A crucial component of a better world would be a drastically shrunken banking system, under democratic community control, oriented toward human need and rational investment, and prohibited to engage in any speculation. Banking should be a public utility. The point of a market is to serve humanity — yet under the current world capitalist system, human beings exist to serve markets. And markets are nothing but the aggregate interests of the most powerful industrialists and financiers.

Financiers may see themselves as untouchable monarchs when they look into a mirror, but we need not swallow such nonsense any more than our ancestors did when they ceased to believe that a king is chosen by God to rule over everyone.

A path toward bringing banks under democratic control

The struggle to create a democratic economy based on human need requires finding a path to a drastically smaller financial industry. Banking should be a utility, under public control and existing to serve the productive economy, in contrast to its current incarnation as an uncontrollable behemoth that exists to extract wealth from all other human activities.

storm over banksGiven the stranglehold of financiers over the world’s economies, democratizing banks will be no easy task. But it can done. Countries such as Norway and Sweden have nationalized their banks, only to promptly hand them back to private owners.

As always, a word of caution is in order: Although the financial industry acts as both whip and parasite in relation to the productive economy (providers of tangible goods and services) — the whip spurring ever harsher working conditions and intensifying the movement of production to low-wage havens and the parasite extracting money from every possible human activity — there is no neat separation of finance from the productive economy in capitalism. Many manufacturers have financial subsidiaries, for instance, and corporate executives grow wealthy from stock-market bubbles inflated by speculators and other financial manipulations.

The giant piles of money thrown into speculation are the products by industrialists’ profits created through exploitation of employees. There is a symbiotic relationship between financiers and industrialists; together they constitute a globalized class that maintains power through a web of institutions while scrambling to manage the ceaseless instability of capitalism. Although the financial industry is powerful, nonetheless there is not a small cabal of bankers who somehow control everything, an idea rooted in Right-wing conspiracy theories that easily shade off into anti-Semitism.

Caveats in place, the power of financiers must be broken to make any meaningful progress toward a democratic economy. What would a real socialization of banking look like? Specifics would naturally vary from country to country, but the Left Party of Germany has put forth a plan for the socialization of the German banking system that can serve as an excellent starting point for discussion. The Left Party’s model is based on specific aspects of existing local German banks, but contains concepts that are applicable to any country.

The report, How a Socialization of the German Banking System Might Look Like, written by Axel Troost and Philipp Hersel, envisions a banking system based on credit unions (some owned cooperatively by members and others owned by municipal governments) and democratized state-owned banks. Private banks would be either closed or drastically shrunk, depending on their solvency. All banks would be responsible to supervisory boards comprised of representatives of community organizations such as trade unions, environmental groups and consumer associations, and citizens directly elected in community votes.

Requiring banks to provide only basic services

All remaining banks would concentrate on what the report terms the core “PSL” functions — payments, loans, savings. Socialized banks would ensure a “low-cost system of payments including a corresponding supply of cash”; finance public- and private-sector investment that is socially and economically useful; and be secure and sustainable places for savings to be held. In the Left Party conceptualization:

“[S]ocialisation should be regarded as the subordination of the financial sector to steering and control by society and the anchoring of the sector in society.” [page 6]

The report stresses that a reduction in the size of the banking system is unavoidable, both to curtail its influence and to eliminate speculation:

“The false principles which have become established in recent decades were primarily propagated by the financial markets: shareholder value, lean government, competition to attract investment and tax competition. This process needs to be reversed, and the financial sector needs to be reduced to the role of a service provider for the overall economy. …

The aim has to be to substantially reduce the size of the financial sector and to diminish its economic and political power. As a service provider for the real economy and society, the financial sector must not be understood any longer as a place where value is added on its own account, but must be regarded as infrastructure needed for the economy as a whole.” [page 5]

Toward that end, private banks would largely disappear, as far as possible through insolvency. Private banks that remain solvent after all liabilities are placed on the balance sheet and who are so interwoven into the larger economy that their immediate shuttering would unravel other banks and enterprises would not be eliminated, but brought under public control and drastically shrunk in size in a manner that would not cause a cascade of collapses in connected banks and enterprises.

All banks would have to put all liabilities on their balance sheet for inspection, including non-performing loans and bad assets; they would no longer be able to hide them. Those without enough assets to cover the losses would be shut down. European law insures all deposits up to €100,000, and that would remain in force. Shareholders would be wiped out, however, and creditors would absorb losses, not taxpayers.

Only if an institution could not be shut down without causing a cascade of losses in other banks and enterprises would any government money be injected, but in these (hopefully rare) cases, shareholders and creditors would be wiped out and the government would assume ownership. The government would then restructure the bank so it would only perform the core “PSL” functions described above.

Credit unions as the foundation for banking

The current German banking system consists of three “pillars”:

  • Public-law banks (municipality-owned local credit unions and state banks).
  • Cooperative banks (credit unions cooperatively owned by their members).
  • Private banks (which operate across the country and include dominant institutions such as Deutsche Bank and Commerzbank).

The municipal- and cooperatively-owned credit unions have have continued to function well since the economic crisis struck. These continue to provide loans to small and medium-sized enterprises and basic services to depositors, and do not engage in speculation. The state banks (banks owned by the state governments within Germany) were supposed to act like the municipal credit unions (on a larger scale) but instead mimicked private banks by engaging in risky businesses outside their original mandates, saddling taxpayers with covering losses. Private banks concentrated on speculation and have done the worst of the pillars; moreover, despite receiving bailouts, private banks provide the least amount of credit.

Putting all banks on the model of the municipal- and cooperatively-owned credit unions, prohibiting speculation and limiting them to the core “PSL” functions would be the outcome of a socialized banking sector. Simply making banks public is insufficient, the Left Party report says:

“It would appear that banks in public and co-operative ownership can at least partially evade the dictates of the desire for profit. However, public ownership alone is no guarantee that an institution will take this opportunity. But private commercial banks have no alternative to an unconditional orientation to profits, because the financial markets systematically enforce the dictate of the profit motive. In view of this, a socialisation of private commercial banks can probably only succeed if they have first been liberated from the dictate of the profit motive by being transferred to public or co-operative ownership.” [page 8]

A key to the success of the municipal- and cooperatively-owned credit unions is that they operate on a small scale and are anchored in their immediate city or region.

“[Germany’s municipal- and cooperatively-owned credit unions] tend to be small-scale and very much anchored in their region. This includes on the one hand the municipal or regional ownership or patronage, and on the other hand the networking with stakeholders like local chambers of industry, commerce and crafts, sports and charity associations, as well as leading local authorities from religious communities, trade unions and intellectuals. To put it another way: [the credit unions] are integrated into their local environment; they can be said to be territorially socialised. This fits in with the fact that these two pillars of the banking system adhere to a strict territorial principle.” [page 8]

Be socially useful, or be shut down

Surviving state-owned and private banks would be required to adhere to the same core “PSL” functions; those that do not go out of business because those functions would be largely covered already by the credit unions would provide loans for large-capital projects beyond the ability of any credit union on its own. But there would be strict limits on the size of any bank and no bank would be allowed to be a national business. Socialized state and regional banks would coordinate on the large projects. Those larger banks are foreseen as being owned by the credit unions to provide another check on their behaviors.

Limits on territory and legal orientation toward social usefulness are see as as keys toward the goal of converting banking into a utility serving society:

“The [municipal and cooperative credit unions] show that a bank can be very successful if its statutes stipulate that its purpose is not abstract orientation to profit, but the exercise of a certain business model in a certain region. … A socialised bank must be characterised by the fact that the core functions of payments, savings and loans (PSL) are stipulated in its statutes as the area of its operations and its business model, and that these activities are only carried out in a certain geographical area. The region covered by the business operations determines which geographical section of a society is responsible for the societal control.” [page 11]

Nonetheless, a federal system of strict regulations would be implemented, including much higher capital requirements, caps on executive salaries and a ban on bonuses and stock options, an extra tax on the highest earners in banking, a tax on all financial transactions, and a requirement that half of the supervisory boards of banks would be allocated to employees and their trade unions and half must be filled by women.

Although the Left Party model is based on existing conditions in Germany, the basic principles are easily adaptable to other countries. Credit unions, for instance, are common in many countries. At least 7,000 exist in the United States (ordinarily owned by members) and more than 300 exist in Canada, although in those two countries they are buffeted by capitalist market forces and face hostility for being an alternative to large private banks. Similar to Canada, the number of credit unions in Britain is declining as smaller ones in particular face difficulties.

Socialization of the banks includes community control, strict restrictions on financial activities, an end to speculation and an environment in which market forces no longer prescribe behavior. The point of a market is to serve humanity — a strong contrast to the current world capitalist system, in which human beings exist to serve markets. And markets are nothing but the aggregate interests of the most powerful industrialists and financiers.

The Left Party model for bank socialization isn’t a ready-made formula, nor does it purport to be one, but is does provide a valuable starting point. Socializing banks is one only component of the broader task of creating a better world. Viable plans such as the Left Party’s nonetheless explode the idea that the current economic system is the only way to organize society — which is just as much an elite-propagated myth as the idea that a monarch is chosen by God to rule over everyone.

Speculators trade in two weeks what the world makes in a year

Speculation rests on phenomenal amounts of money sloshing around the globe. We could call this endless wave a permanent tsunami, except that would grossly understate the size of the financial wave.

If we could pile up all the money that is exchanged in financial markets and make a literal wave out of it, it would make for an astounding sight were we on the International Space Station, towering above the clouds. The wave would rise so high it might swamp the space station itself.

All right, I am getting fanciful here. And we wouldn’t want to contemplate having to bail out the space station in zero-G conditions. But we are talking about an international financial industry that has truly grown to monstrous proportions, beyond any reasonable necessity.

How big? The combined daily trading average on the world’s foreign-exchange, bond and stock markets is very roughly about US$6 trillion. If that total seems amazing, it is for good reason: By way of comparison, the gross domestic product of the world is about $65 trillion. To put it another way, in 11 business days financial speculators trade instruments and contracts valued at more than all the products and services produced by the entire world in one year.

Most of us are familiar with stock exchanges, and that is the financial market that draws the lions’ share of corporate mass media attention. But that is actually only a tiny portion; an average day’s turnover on the world’s stock markets amounts to $270 billion. Bond markets (government debt, corporate debt and the myriad of “asset-backed” securities continually cooked up) are several times larger, and foreign exchange is vastly larger than bond markets.

Much of this daily $6 trillion turnover is in derivatives, swaps, futures contracts and assorted legerdemain. Almost all of this is nothing more than self-interested speculation; trading for the sake of the largest possible short-term profits regardless of the cost to the rest of the economy or the destabilizing social costs of these giant pools of capital sloshing around the world, pouring in capital here and pulling capital there as opportunities for short-term profits wax and wane.

Why do stock markets exist?

In theory, stock markets exist to distribute investment capital to where it is needed and to enable corporations to raise money for investment or other purposes. In real life, neither is really true. A corporation with stock traded on an exchange can use that status to issue new shares, raising money without the burden of dealing with lenders and paying them interest. But large corporations can raise money in a variety of ways, for example by issuing bonds or other interest-bearing debt, or by selling shares directly to private investors.

Nor do corporations necessarily wish to float new stock — doing so is disliked by investors because profits are diluted when spread among more shares. Instead, it is more common for large companies to buy back shares of their stock (at a premium to the trading price), which means less sharing of distributed profits.

From 1981 to 1997, for example, non-financial corporations in the United States bought back $813 billion more in stock through buyback programs and corporate takeovers than they issued.* That is money that was diverted from investment, employee compensation or community development, and constitutes still more money stuffed into financiers’ pockets.

Most of the action on stock exchanges is simply speculation, and as computers become more sophisticated, the speculation drives higher trading volumes and becomes more remote from the actual business of the company in which stock is bought. “Day trading,” where speculators buy and sell stock within minutes to earn profits on price fluctuations became common in the 1990s, but in the following decade the big Wall Street firms showed their muscle while bringing speculation to an unprecedented level.

These firms created sophisticated computer programs that buy and sell stocks in literally milliseconds. The programs issue thousands of buy orders that are canceled in minuscule fractions of a second in order to manipulate prices to the benefit of the computer owner. These price differences are only pennies, but are done on such enormous scale that the profits skimmed in this fashion are estimated to be as high as $21 billion per year — only a “handful” of these high-speed computer traders account for a majority of all stock-exchange trades.**

Speculation for its own sake

Speculation tends to reinforce itself. During the two years I spent working on a financial news service during the 1990s stock-market bubble, I repeatedly heard traders say the dramatic price rises could not last but they would continue to ride the bubble as long as the consensus view that the long bull market would continue remained in place. The primary reason for why market players believe stock prices will rise at a given time is because they believe other market players believe stock prices will rise. Not nearly as “scientific” as financiers would have you believe.

Bond and foreign-exchanges markets are no less fueled by speculation, and it is the gargantuan size of these markets that give the larger players in them the power to dictate to the world’s governments, extracting budget-busting bailouts, imposing austerity and raising their needs above all social considerations.

Their size is truly monstrous: the world’s 1,000 largest banks held an estimated US$102 trillion of assets in 2011. Separately, the “shadow banking” system (hedge funds, private-equity firms and other investment companies) is worth an additional $67 trillion.*** Financiers hold an amount of capital that is more than two and a half times larger than the world’s gross domestic product.

As more money is diverted into speculation because there are insufficient opportunities for investment, the size of the financial industry and the percentage of corporate profits claimed by the financial industry steadily grows — the size of both banks and unregulated “shadow banks” have increased since the beginning of the economic crisis in 2008. This capital is a function of the amount of money flowing upward to the rich becoming larger than they can use for personal luxury consumption or investment; these torrents of money are diverted into increasingly risky pure speculation.

Too much money comes to chase too few assets, rapidly bidding up prices until there is no possible revenue stream that can sustain the price of assets bought at inflated levels, triggering a crash. The very size of financial markets is a major contributing cause of economic instability. That size is in turn a product of the continual downward pressure on wages — an increasing share of corporate revenues go toward executive pay and profits as the share going toward wages declines.

A financial industry swollen to such gargantuan sizes have no relation to the actual needs of the economy. It is money that could be used for wages (which would strengthen the economy) or for productive investment were it not so concentrated and under-taxed. Austerity, after all, is only for working people.

* Doug Henwood, Wall Street [Verso, 1998], page 3
** Charles Duhigg, “Stock Traders Find Speed Pays, in Milliseconds,” The New York Times, July 24, 2009
*** TheCityUK; the Financial Stability Board

Nationalizing banks works for the short term; why not permanently?

U.S. President Barack Obama famously sneered that “Sweden had like five banks” when dismissing the idea of a government takeover of the U.S. banks that brought down the world economy. He did so despite acknowledging that Sweden had swiftly overcome its early 1990s financial crisis by taking over its largest banks.

The president was channeling a prevailing mythology within the United States — namely, that Sweden is a socialist country. Socialist! Run, run for your life! Therefore anything Swedish must automatically be so horrifying that we must not allow any thoughts about it to enter our minds for even a fleeting second.

Sweden is actually a capitalist country (albeit one with social-welfare policies to ease capitalism’s harshness), and the solution that it used to put its big banks back on their feet was well within the confines of capitalism. Actually, Sweden did not go as far as its neighbor, Norway, which also nationalized big banks to overcome its own early 1990s financial crisis.

Sweden and Norway made the banks — and their executives, directors and shareholders — pay for the crisis they caused, rather than making their taxpayers pay for it. Unsurprisingly, deregulation and speculation were behind the Scandinavian meltdowns.

Rather than following the Scandinavian model, the U.S. government shoveled trillions of dollars into its big banks following the 2008 financial meltdown without forcing any changes in banking practices or management. Or much of anything — it was the world’s biggest blank check. As a result, the banks are bigger than ever, the bonuses executives give themselves are as big as ever, not a single financier has been brought to justice, the financial crisis goes on and we remain at the mercy of the financial industry.

Sweden and Norway may not be large countries, but, despite President Obama’s sneering comment, they are not tiny, either. Sweden, in fact, has more than 100 banks. What Sweden and Norway have in common with the U.S. is that their banking industries are dominated by a few large banks. The four biggest banks in the U.S. in the first months of the economic crisis — JP Morgan Chase, Citigroup, Bank of America and Wells Fargo — accounted for almost two-thirds of the assets of U.S. commercial banks. Thus, as Keynesian economist Paul Krugman once noted in his blog, “as far as this discussion is concerned, we’ve got, like, four banks.”

Norway wipes out shareholders, fires bankers

Because Norway took stronger measures than Sweden, let’s start the comparison there. Four banks accounted for almost 60 percent of bank lending in Norway on the eve of its crisis, and three of them would get themselves into deep trouble. Norwegian banking had been tightly regulated, but in the mid-1980s a series of measures lifted most regulation of banking and housing and eliminated capital controls, sparking a wave of speculation in the forms of a boom in new lending and a real estate bubble. Household consumption rose dramatically, based on debt incurred via the new loose credit, and bank managers began to be paid based on growth in lending.

A simultaneous drop in oil prices (Norway is dependent on oil exports) led to a devaluation of Norway’s currency (then on a fixed exchange rate) and a trade deficit. As the real estate bubble began to burst, several of Norway’s small banks failed, a problem that could initially be contained because the Norwegian government had continued to enforce a requirement that all of the country’s banks contribute to guarantee funds; these funds covered depositors. But continued financial turbulence caused two of the country’s four biggest banks to fail and a third to be on the brink of failure.

The guarantee funds had been depleted due to the failures of the small banks, and private investors were unwilling to invest with their own capital. The Norwegian parliament stepped in and injected capital directly into the banks, taking ownership and enforcing several conditions, including these:

  • Existing share capital would be written down to fully cover losses — shareholders would be wiped out.
  • Managers and members of the board of directors would be fired.
  • Banks must reduce operating costs and downsize some activities.

The banks were now owned by the government, which acted like an owner. But that ownership was exercised not directly by the government, but through a special agency created for the purpose of managing the taken-over banks and staffed by specialists to avoid political interference. Eventually, the Norwegian government sold all the shares of two banks and retained a minority interest in the third to block a foreign takeover of what is now the only one of the major banks to be based in Norway. By 2001, the government had earned a net gain for its troubles.

This program specifically avoided guaranteeing bank losses. It was designed so that taxpayers would not assume the risk, which would only encourage more risk-taking by bankers. In a report on these events, the deputy governor of Norges Bank (Norway’s central bank) wrote:

“If the government injects new capital into a crisis-stricken bank, it is important that the value of the existing shares are written down as far as necessary to cover the losses. Otherwise, the government would implicitly be using taxpayers’ money to subsidize shareholders of a failed or failing bank and would give rise to serious moral hazard problems.”

Sweden forces banks to write down losses

The Swedish government did not impose conditions as stringent as those imposed in Norway, but did make shareholders absorb some of the pain and nationalized the most troubled big banks. Financial deregulation in the 1980s led to reckless lending and a real estate bubble in Sweden. When the bubble burst in 1991 and 1992, Sweden fell into a recession and unemployment quintupled in three years.

The Swedish government declared it would guarantee all deposits in all banks, committed itself to recapitalizing banks in trouble and said any bank seeking government money would have to first write down its losses. Sweden did seize the most troubled big banks, although in one case (in which it already owned a majority interest) the government paid the full price for acquired shares rather than wiping out shareholders.

Sweden then set up two “bad banks” and transferred non-performing loans made by the taken-over banks to them. Privately owned banks would have forced immediate bankruptcies to shut down and seize the assets of the small and midsize businesses that had taken out these loans they could not repay. In contrast, the government “bad banks” took control of the businesses and worked to stabilize them for eventual re-sale, the proceeds of which would recover the bad loans.

For the most part, however, Sweden forced shareholders out of failed banks and imposed stringent risk-management measures and overhead reductions. But by issuing a blanket guarantee of all bank loans, the government benefited shareholders of the banks that had not been taken over, a contrast to Norway. But, similar to its neighbor, Swedish taxpayers benefited when the government later sold its shares in taken-over banks.

U.S. rewards bankers for destroying economy

In contrast, the U.S. government, during both the Bush II/Cheney and Obama administrations, handed out vast sums of money with no strings attached. Wall Street executives, on loan to the government, “advised” the presidents that unconditional and unlimited bailouts to their companies could be the only solution. As a result, financiers remain free to speculate at will and give themselves vastly bloated salaries and bonuses. A good example is provided by a Dartmouth University professor, B. Epsen Eckbo, who wrote during the first months of the economic meltdown:

“It’s a zero-sum game: if the tax-payer doesn’t insist on the best possible deal, some other party to the bailout will reap benefits at the tax-payer’s expense. A clear case in point is the $8 per share windfall to shareholders of Bear Stearns, when the government debt guarantee of that firm caused JPMorgan to raise its takeover bid from $2 to $10. This type of shareholder windfall, which we also saw in Sweden as the stock market responded to the government’s blanket debt guarantee, would have been avoided had the government taken an equity stake in the bailed-out bank.”

The Obama administration did take an equity stake when it bailed out the automobile manufacturers General Motors and Chrysler, with the potential to earn a profit from doing so, while saving jobs directly and indirectly associated with the two companies.

Why not do the same with big banks? Or, why don’t we not be timid and go further: Why not eliminate financial speculation through public ownership of banks? Norway and Sweden did solve their banking crises, but not underlying economic weaknesses — Norway remains dependent on high oil prices and Swedish unemployment, while well below its peak, remains far above what it was before the early 1990s crisis.

In fact, there is a successful example of state-owned banking inside the United States. It is the Bank of North Dakota, wholly owned since 1919 by that state’s government. The Bank of North Dakota operates as a commercial bank, taking deposits and making loans, and also is where the state government deposits its revenue.

The state’s tax money, therefore, is invested in local infrastructure projects rather than being used for speculation by national banks as other states’ revenues are. So successful is the bank that it has given $300 million in profits to the state government in the past ten years.

North Dakota is the only one of the 50 U.S. states to have its own bank, and while the local economy is currently strong due to an oil and gas boom, it certainly serves as an example. Why not replicate this success elsewhere?

As long as we are asking questions, why should something so critical to a modern economy as finance and banking be in private hands for private profit, and be conducted recklessly at the expense of everybody else? Why shouldn’t banking be a public utility, operated for public good? Otherwise, it is only a matter of time before the next financial crisis, when, once again, the profits will be privatized and the losses socialized.

It’s not the Federal Reserve, it’s the system it serves

By Pete Dolack

There are details, and then there is the big picture. Mistaking the former for the latter can send an activist down the wrong path. A good example of this are the often well-meaning people who resolutely demand that we “End the Fed.”

But the problem isn’t the Federal Reserve, it is the system that it serves. If you don’t like the Fed, what you actually don’t like is the capitalist system.

The Federal Reserve, the central bank of the United States, is surely (as its critics accurately charge) a far too secretive, unaccountable branch of government that protects the interests of financiers at the expense of everybody else. A democratically accountable Fed that promulgated policies to increase employment and toward a socially responsible financial system would be welcome reforms.

But they would be unstable reforms, tinkering at the margins and would likely not change Fed policy in dramatic ways. Moreover, increasing oversight on the Fed wouldn’t eliminate the dominance of Wall Street or the largest corporations. There is plenty of oversight of other U.S. government agencies, yet corporate interests have little trouble bending policies toward their preferred outcomes.

Going further, and abolishing the whole thing, is, to be blunt, not a serious demand. Eliminating the Fed is a pointless idea because a central bank is a necessity in an advanced capitalist country, which is why each has one. And, perversely, eliminating the central bank would actually increase the dominance of financiers and would make the booms and busts of the capitalist business cycle sharper than they already are.

Strange as it seems today, when many voices on the Right and the Left echo the demand of “End the Fed,” there was a populist component to the creation of the Fed. Populists of the late 19th century wanted a more elastic currency so that the government could extend emergency credit when the economy collapsed (as it then frequently did) rather than be handcuffed by the gold standard.* In those days, when a crash happened, the U.S. government had to turn to the biggest robber barons of the day, such as J.P. Morgan, and ask them directly for a bailout.

Banks hoarded their reserves during crashes, making the downturns worse, and could issue their own banknotes, helping to fuel bubbles. But, since we are talking about the United States, it took a consensus on Wall Street and not popular demand for a central bank to be created in 1913. Financiers had come to believe that a central bank would temper the extremes of booms and busts, thereby stabilizing the economy. Industrialists joined financiers in that consensus.

Needless to say, the capitalists and not the populists were the drivers of Fed policy from the beginning. But a central bank does, albeit in a highly inegalitarian manner, stabilize a national economy through regulating credit and alternately tightening and loosening monetary policy. Central banks in all advanced capitalist countries manage domestic money supplies and currencies, a crucial task in today’s world in which markets subject to wild swings set prices for everything. The exception is in the countries using the euro, in which national central banks don’t have a currency to manage and are subordinate to the supranational European Central Bank, which is even more unaccountable than national-level central banks.

It won’t come as a surprise that financial institutions are skilled at finding ways around central bank policies. And central banks don’t necessarily do good, either — the Fed under Alan Greenspan encouraged the 1990s stock market bubble and the real estate bubble of the 2000s, and the post-crash Fed of Ben Bernanke is focused on the non-existent phantom of inflation while ignoring the all too real problem of high unemployment. The European Central Bank is, if anything, even more guilty of that than the Fed. The Fed, typical of central banks, is an institution staffed by and ideologically dependent on the financial industry. So it is no surprise that it consistently acts in a manner that benefits the financial industry and is detrimental to working people.

The entire capitalist system acts to benefit capitalists (industrialists and financiers) to the detriment of working people. Why should we expect an arm of a capitalist government to act any different? (Contrary to popular mythology, the Fed is part of the government, the Treasury Department to be specific; its all-powerful chair and board of governors are appointed by the president and approved by the Senate.)

If the Fed were eliminated, the exact same powerful capitalist interests would continue to bend government policy to their preferred outcome and would continue to exercise the same dominance over government, social institutions and the mass media. The only difference would be that the economy would become more unstable than it already is because there would be less ability on the part of government to dampen excesses. Why would that be good?

Concomitant to “End the Fed,” for those on the Right who echo that slogan, is a yearning to return the U.S. dollar to the gold standard. Most of these people do yearn for the good old days of the 19th century, when women, minorities and working people knew their place, and paid a violent price if they didn’t. I’ll pass over the irony of working people yearning for such a time. Unfortunately for gold fetishists, there is no returning to those simple times as capitalism has evolved into a much more complicated system. Capitalism can no longer function under a gold standard and indeed outgrew it in the 1970s.

Richard Nixon, then the U.S. president, pulled the dollar off the gold standard because retaining it was no longer in the interest of the U.S. despite the dollar’s centrality in the Bretton Woods system of fixed currency rates. In that system, implemented at the end of World War II, the dollar was fixed to the price of gold and all other currencies were fixed to the dollar; governments could and did change the value of their currencies based on their particular interests. Doing so was a big deal.

Such a system is more stable than the current one of free-floating currencies that continually rise and fall in foreign-exchange markets. Today’s system is heavily skewed by speculators, and it is precisely the pressure of financial speculators that began to burst the system of fixed exchange rates — today, the size of foreign-exchange markets dwarfs the size of stock markets and those traders are not about to forgo their profits.

There is too much special interest by financiers and speculators to allow a resumption of a gold standard. Going back on the gold standard would also handcuff governments trying to stimulate economies during economic downturns because they would not be able to issue new money. The supply of money would be determined by the productivity of South African gold mines, a rather odd circumstance. Moreover, gold is a commodity the same as any other; despite the fetishes that attach to it there is nothing more intrinsic to valuing money on it than on any other commodity. Why not tie the dollar to aluminum?

Capitalism is an unstable system that will always have booms and busts, and as time goes on the busts tend to worsen. (That tendency was temporarily kept at bay after the Great Depression by significant reforms, but those reforms have been undone and the tendency has reasserted itself.) Capitalism is a system in which those who amass the capital thereby amass power, and power translates into the ability to bend the rules to preferred outcomes or to bypass the rules. Money concentrates into fewer hands and wages are squeezed to facilitate the upward flow of money. Those who succeed are the people endowed with outsized desires to acquire and the personality traits that enable those desires to be met.

Yes, those people so endowed can and do create policy for the Fed, or any central bank. But ending the Fed wouldn’t touch the ability of people so endowed to suffuse their viewpoints and favored policy outcomes throughout a capitalist society, nor would it touch their ability to leverage their outsized wealth and the power their wealth gives them to shape government policy to benefit themselves.

Getting rid of government would actually intensify the dominance of industrialists and financiers in all spheres of life. The dominance of a globalized class that maintains power through a web of institutions and scrambles to manage ceaseless instability — not a small cabal of bankers who somehow control everything, an idea rooted in Right-wing conspiracy theories that easily shade off into anti-Semitism.

If you don’t like what the Fed does, it is because you don’t like what the capitalist system does. Blaming the central bank is no more than blaming the messenger.

* This and the following paragraph are based on the book Wall Street by Doug Henwood, pages 92 to 95 [Verso, 1998]