by Ellen
Brown
The world is
undergoing a populist revival. From the revolt against austerity led
by the Syriza Party in Greece and the Podemos Party in Spain, to
Jeremy Corbyn’s surprise victory as Labour leader in the UK, to
Donald Trump’s ascendancy in the Republican polls, to Bernie
Sanders’ surprisingly strong challenge to Hillary Clinton –
contenders with their fingers on the popular pulse are surging ahead
of their establishment rivals.
Today’s
populist revolt mimics an earlier one that reached its peak in the US
in the 1890s. Then it was all about challenging Wall Street,
reclaiming the government’s power to create money, curing rampant
deflation with US Notes (Greenbacks) or silver coins (then considered
the money of the people), nationalizing the banks, and establishing a
central bank that actually responded to the will of the people.
Over a
century later, Occupy Wall Street revived the populist challenge,
armed this time with the Internet and mass media to spread the word.
The Occupy movement shined a spotlight on the corrupt culture of
greed unleashed by deregulating Wall Street, widening the yawning gap
between the 1% and the 99% and destroying jobs, households and the
economy.
Donald
Trump’s populist campaign has not focused much on Wall Street; but
Bernie Sanders’ has, in spades. Sanders has picked up the baton
where Occupy left off, and the disenfranchised Millennials who
composed that movement have flocked behind him.
The
Failure of Regulation
Sanders’
focus on Wall Street has forced his opponent Hillary Clinton to
respond to the challenge. Clinton maintains that Sanders’ proposals
sound good but “will never make it in real life.” Her solution is
largely to preserve the status quo while imposing more bank
regulation.
That
approach, however, was already tried with the Dodd-Frank Act, which
has not solved the problem although it is currently the longest and
most complicated bill ever passed by the US legislature. Dodd-Frank
purported to eliminate bailouts, but it did this by replacing them
with “bail-ins” – confiscating the funds of bank creditors,
including depositors, to keep too-big-to-fail banks afloat. The costs
were merely shifted from the people-as-taxpayers to the
people-as-creditors.
Worse, the
massive tangle of new regulations has hamstrung the smaller community
banks that make the majority of loans to small and medium sized
businesses, which in turn create most of the jobs. More regulation
would simply force more community banks to sell out to their larger
competitors, making the too-bigs even bigger.
In any case,
regulatory tweaking has proved to be an inadequate response. Banks
backed by an army of lobbyists simply get the laws changed, so that
what was formerly criminal behavior becomes legal. (See, e.g.,
CitiGroup’s redrafting of the “push out” rule in December 2015
that completely vitiated the legislative intent.)
What Sanders
is proposing, by contrast, is a real financial revolution, a
fundamental change in the system itself. His proposals include
eliminating Too Big to Fail by breaking up the biggest banks;
protecting consumer deposits by reinstating the Glass-Steagall Act
(separating investment from depository banking); reviving postal
banks as safe depository alternatives; and reforming the Federal
Reserve, enlisting it in the service of the people.
Time to
Revive the Original Populist Agenda?
Sanders’
proposals are a good start. But critics counter that breaking up the
biggest banks would be costly, disruptive and destabilizing; and it
would not eliminate Wall Street corruption and mismanagement.
Banks today
have usurped the power to create the national money supply. As the
Bank of England recently acknowledged, banks create money whenever
they make loans. Banks determine who gets the money and on what
terms. Reducing the biggest banks to less than $50 billion in assets
(the Dodd-Frank limit for “too big to fail”) would not make them
more trustworthy stewards of that power and privilege.
How can
banking be made to serve the needs of the people and the economy,
while preserving the more functional aspects of today’s highly
sophisticated global banking system? Perhaps it is time to reconsider
the proposals of the early populists. The direct approach to
“occupying” the banks is to simply step into their shoes and make
them public utilities. Insolvent megabanks can be nationalized – as
they were before 2008. (More on that shortly.)
Making banks
public utilities can happen on a local level as well. States and
cities can establish publicly-owned depository banks on the highly
profitable and efficient model of the Bank of North Dakota. Public
banks can partner with community banks to direct credit where it is
needed locally; and they can reduce the costs of government by
recycling bank profits for public use, eliminating outsized Wall
Street fees and obviating the need for derivatives to mitigate risk.
At the
federal level, not only can postal banks serve as safe depositories
and affordable credit alternatives, but the central bank can provide
a source of interest-free credit for the nation – as was done, for
example, with Canada’s central bank from 1939 to 1974. The U.S.
Treasury could also reclaim the power to issue, not just pocket
change, but a major portion of the money supply – as was done by
the American colonists in the 18th century and by President Abraham
Lincoln in the 19th century.
Nationalization:
Not As Radical As It Sounds
Radical as
it sounds today, nationalizing failed megabanks was actually standard
operating procedure before 2008. Nationalization was one of three
options open to the FDIC when a bank failed. The other two were
closure and liquidation, and merger with a healthy bank. Most
failures were resolved using the merger option, but for very large
banks, nationalization was sometimes considered the best choice for
taxpayers. The leading U.S. example was Continental Illinois, the
seventh-largest bank in the country when it failed in 1984. The FDIC
wiped out existing shareholders, infused capital, took over bad
assets, replaced senior management, and owned the bank for about a
decade, running it as a commercial enterprise.
What was a
truly radical departure from accepted practice was the unprecedented
wave of government bailouts after the 2008 banking crisis. The
taxpayers bore the losses, while culpable bank management not only
escaped civil and criminal penalties but made off with record
bonuses.
In a July
2012 article in The New York Times titled “Wall Street Is Too Big
to Regulate,” Gar Alperovitz noted that the five biggest
banks—JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and
Goldman Sachs—then had combined assets amounting to more than half
the nation’s economy. He wrote:
With
high-paid lobbyists contesting every proposed regulation, it is
increasingly clear that big banks can never be effectively controlled
as private businesses. If an enterprise (or five of them) is so
large and so concentrated that competition and regulation are
impossible, the most market-friendly step is to nationalize its
functions. . . .
Nationalization isn’t as difficult as it sounds. We tend to forget
that we did, in fact, nationalize General Motors in 2009; the
government still owns a controlling share of its stock. We also
essentially nationalized the American International Group, one of the
largest insurance companies in the world, and the government still
owns roughly 60 percent of its stock.
A
more market-friendly term than nationalization is “receivership”
– taking over insolvent banks and cleaning them up. But as Dr.
Michael Hudson observed in a 2009 article, real nationalization does
not mean simply imposing losses on the government and then selling
the asset back to the private sector. He wrote:
Real
nationalization occurs when governments act in the public interest to
take over private property. . . . Nationalizing the banks along these
lines would mean that the government would supply the nation’s
credit needs. The Treasury would become the source of new money,
replacing commercial bank credit. Presumably this credit would be
lent out for economically and socially productive purposes, not
merely to inflate asset prices while loading down households and
business with debt as has occurred under today’s commercial bank
lending policies.
A
Network of Locally-Controlled Public Banks
“Nationalizing”
the banks implies top-down federal control, but this need not be the
result. We could have a system of publicly-owned banks that were
locally controlled, operating independently to serve the needs of
their own communities.
As
noted earlier, banks create the money they lend simply by writing it
into accounts. Money comes into existence as a debit in the
borrower’s account, and it is extinguished when the debt is repaid.
This happens at a grassroots level through local banks, creating and
destroying money organically according to the demands of the
community. Making these banks public institutions would differ from
the current system only in that the banks would have a mandate to
serve the public interest, and the profits would be returned to the
local government for public use.
Although
most of the money supply would continue to be created and destroyed
locally as loans, there would still be a need for the
government-issued currency envisioned by the early populists, to fill
gaps in demand as needed to keep supply and demand in balance. This
could be achieved with a national dividend issued by the federal
Treasury to all citizens, or by “quantitative easing for the
people” as envisioned by Jeremy Corbyn, or by quantitative easing
targeted at infrastructure.
For
decades, private sector banking has been left to its own devices. The
private-only banking model has been thoroughly tested, and it has
proven to be a disastrous failure. We need a banking system that
truly serves the needs of the people, and that objective can best be
achieved with banks that are owned and operated by and for the
people.
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