Does our economic system require banks in order to function? Should banks exist?
During this time of economic distress, two large concepts have stuck out perfectly. One is that the banks hold ultimate leverage over the political process. Two is that the banks cannot operate without government asistance (and furthermore derive their money itself from government). So consider this observation by Foreign Policy:
Ironically, one of the most radical proposals making the rounds today has come from an economist at the London School of Economics, Willem Buiter, a former member of the Bank of England’s Monetary Policy Committee and certainly no Marxist. Buiter has proposed that the whole financial sector be turned into a public utility. Because banks in the contemporary world cannot exist without public deposit insurance and public central banks that act as lenders of last resort, there is no case, he argues, for their continuing existence as privately owned, profit-seeking institutions. Instead they should be publicly owned and run as public services.
This point is emerging in the national thinking here also. Once you start thinking about how to regulate the finance industry so it doesn’t run amok again, it’s natural enough to ask if some things should just be cut out of the system entirely.
A couple of weeks ago Ezra Klein in a post asking Is Financial Innovation a Good Thing? cited a post from Felix Salmon on regulating financial markets that made a good start but didn’t really propose any solutions. I left a long comment there, the pith of which is this:
I like Felix Salmon’s points, as far as they go, but he doesn’t say or seem to know exactly how to regulate these institutions. Maybe that’s because he’s not going deep enough to cut out the cancer.
I continued this thought, poorly written and a little sweeping, but here it follows anyway.
The more reliable solutions may lie in the fundamental area of asking: what, exactly, do we need banks for anymore? Are they really that good at moving money and credit around? Couldn’t we do it better, at far less cost?
The money power is everywhere a sovereign power, and sovereignty in the U.S. means us the people. We, through the Fed, create (and destroy) money, but it goes first to the banks, who make a percentage on it before it even trickles down to us, discounted in value by the mildly inflationary activity of the banks before us.
The banks also make a percentage on our deposits in checking accounts, while all we need is a trustworthy storehouse of stable currency to draw on for spending purposes.
The modern system of adjusting the money supply through interest-dependent banks is an inheritance from the centuries during which the only thing that could move money around was interest, and banks were the vaults that handled the stores of excess liquidity, paying less interest than they earned, and making their profits in the difference.
The banks still enjoy this legacy position as a supposedly necessary part of the economic matrix. But are they?
Right now a vast amount of our sovereign credit and good faith is going down the drain to make whole a class of people who have violated their obligation to manage their own economic affairs prudently, as good stewards of trust, as the privileged intermediary between the Federal Reserve System’s money creation and the markets.
The only thing that has made our economy stable throughout our history has been Federal intervention as the guarantor of last resort. The government, and thus the American people, have taken up the fiduciary responsibility laid down by the banks. Our latest crisis is little different from all the other panics we’ve had to endure because nobody could come up with a better system of financing the productive economy.
The answers to the failures of finance don’t need to be looked for in a narrow view of what was missing this time around in terms of regulation. The answers need to be sought from the long history of bank and market failures, and in our willingness to take a fresh look at the mechanics of the financial sector. We should be asking, how we can actually create an economy that behaves in a manner as stable as the sovereign guarantee which is the only thing that makes it all possible in the first place?
It’s time to get rid of the whole idea of banks, and time for us to start managing our own money and credit ourselves, using the computers that made the Internet, and our own crowdsourcing, and transparently numerated money and instruments of money.
If finance today is unintelligible to almost all people, that doesn’t mean we can’t design perfectly understandable methods of loan and repayment, and risk and reward, and stable money measures, and have all of this be subject to the rule of law and sovereign political accountability.