Should Banks Be Public Utilities? Posted on August 24, 2011 by Yves Smith We discuss what the role of banks should be, given how much government support they have, on Real News Network. Enjoy! More at The Real News Post navigation ← Tom Ferguson: The English Riots – Just Meaningless Sound and Fury? More on the Opacity of Bank of America’s Financial Statements → Subscribe to Post Comments 59 comments Guy2k August 24, 2011 at 2:10 am I long for the day I can view this on my iPad. ReaderOfTeaLeaves August 24, 2011 at 12:08 pm I just did. Retry clicking the link to RNN (Real News Network). The clip with Yves is lower on their front page, but appears to be wrapped in YouTube format that should work for you — unless your WiFi link is too weak to carry the video data. Good luck! Guy2k August 24, 2011 at 8:23 pm Thanks, helpful stranger! ScottS August 24, 2011 at 2:22 am Well done, Yves! Linus Huber August 24, 2011 at 3:36 am Great interview. Your thinking, Yves, does match mine on all basic issues. anjon August 24, 2011 at 3:57 am I like it! Thanks All you need is steady and reliable flow! “Innovating” here is a waste of innovation As always, a big “thank you” to sister Yves babaganush August 24, 2011 at 4:15 am Very good, thanks. Much better lighting than the NASDAC booths as well. I wish it wasn’t Don Quijote in the background, though – wrong connotations, something subliminal. Should maybe have been Lord of Rings or similar where good triumphs over evil in an epic battle…”thou shall not pass!” attempter August 24, 2011 at 8:06 am Book 1 is fine, as long as one avoids Book 2 where Cervantes sells him out (Nietzsche thought he was pandering to the church). It’s the same character deterioration as in Marlowe’s Faust, except that DQ isn’t supposed to have sold his soul. financial matters August 24, 2011 at 8:38 am Yes, or maybe the ranger/king Aragorn (Strider) with his elven bride Arwen (Evening Star). robert hayes August 24, 2011 at 4:32 am Wow, smart and beautiful… pu$ybref August 24, 2011 at 5:31 am I have heard it argued before the Fed was instituted, the bust boom cycle made it impossible for long term planning or successful business decisions. Then Christina Romer released a paper recently that having the fed really didn’t help the boom/bust cycle, in fact, she argued it could be justified that the FED actually made the cycle more damaging. Having the banks as a public utility, managed by a few czars in DC and Wall Street doesn’t make sense to me. Certainly the information flow and application of it by a few hundred million market participants is superior no? All my friends in the mortgage business predicted the doom we have because of Fannie competing with and destroying the private market. Sometimes towe of babels just grow too big. craazyman August 24, 2011 at 5:56 am I’ve also considered the long-term difficulties that would likely arise if government officials were ultimately making lending decisions (not that they’d do a worse job than the toadies at the banks, though). I think that is a special case of a more general phenomenon, i.e. the problem of concentrated power and the challenge of managing a monopoly. This can be addressed to some extent the way it’s done in the electric utility industry — that is, through creation of state commissions empowered to enforce the public interest. Capture would be a problem there too, but regular elections and clear mandates for the commissioners could help contain it. The public interest is defined fairly well in the electricity area. It’s more complicated and less developed in the realm of money — and given the lack of a natural territory well defined and constrained by infrastructure — but it wouldn’t be impossible to frame this in a sensible way. The exercise itself would illuminate the thought space and foment healthy creativity. I’m optimistic that it would produce better banking and advance democracy at the same time. pu$ybref August 24, 2011 at 6:11 am “regular elections and clear mandates for the commissioners ” Who was it that said elections don’t matter, as long as I get to pick who counts the votes? Stalin? I am from Florida, the 2000 presidential election cured me of the sillyness called VOTING :) I have recently read articles about electricity companies in detroit who have hired companies that fly unmanned robot airplanes over detroit with infrared cameras to find who is stealing thier JUICE so they can send in the DISCONNECT teams to unhook those families from our borg grid and let those suckers FREEZE ;) There is just too much moral hazard out there, people depended on the government, on the ratings agencies, on so much MORAL HAZARD corrupt cronyism. We need to start reversing the tower of babel, if we want a better world and society, we need more people taking personal responsibility and collecting and acting on information on thier own, and less of trusting in banks, ratings agencies and government to take care of them, Ed Bernays is laughing at us all from his grave. Yves just scared me half to death saying we need to formally make banking a public utlity (which will only cause more market participants to be even more lazy, and INCREASE moral hazard from what I can tell) Stop the backstops, take away the safety nets, and people suddenly WAKE UP and start taking things more seriously. People didn’t think the titanic could be sunk, so they didn’t take it seriously when disaster struck and lots of humans died, Mish says end the FDIC, no more deposit protection, you want to feposit with a bank, you better get to know them, check out their loans, rely on YOURSELF to make sure they are doing good stuff, and not some lying corrypt crony government official or ratings agency or whateva! Anonymous Jones August 24, 2011 at 1:07 pm Yes, as long as we get rid of that silly deposit insurance and remove moral hazard and everyone uses more of their valuable time to investigate things that are beyond their knowledge and cognitive capabilities, there will be no more problems. At the very least, you’ve proven so forcefully that there will be *fewer* problems. That’s beyond a doubt. Increase freedom! By denying people the freedom to engage in insurance schemes! pu$ybref August 24, 2011 at 6:23 am Thinking more on this meme of public protection by state officials, Yves has done a good job pointing out how state Attorney Generals are being silly regarding all this MERS fraud and mortgage mess. I am sorry dude, I have lost all faith in people more powerful and politically connected than me. I don’t trust any government official, elected or not, to not be corrupted by money and power, that is just the nature of the game. Since the “system” can’t improve my standard of living and give me MORE, as a greed seeking gordon gecko capitalist with an adam smith invisible hand, I want FREEDOM from this current system. Bleed with me Bro, http://www.youtube.com/watch?v=8n0Q8THJE60&feature=related Yves Smith Post authorAugust 24, 2011 at 7:12 am You’ve got a hidden assumption here, that public utility banks will be micro managed. In Sweden, when they nationalized the banks (actually IIRC one bank), they replaced the management and board and set guidelines and goals. They measured progress against these high level objectives really closely but they did not meddle in day to day operations. pu$ybref August 24, 2011 at 2:51 pm You make the mental breakthrough in the video above Yves, even another financial nuclear disaster will not fix the core problem, don’t backslide now. No matter what institutions we form, what we regulate, who we vote in, it will all be a folly, for it is all built on top of a corrupt crony political foundation that is rotten to the core. We need to rebuild the foundation, restructure the government in ways Arnold Kling suggsted in his 250 states proposal, then with a better foundation and government, we can rebuild the institutions and regulations to better serve public purpose. Is it possible? THe founding fathers fled Europe, they didn’t see changing England from within, perhaps we can not do it either. Only have the corruption and cronyism has burned us financially to the ground, maybe then a phoenix can rise from the ashes with a new political system. craazyman August 24, 2011 at 5:46 am that was one of the best interviews I’ve seen anyway. that was a clear, straightforward and reasonably simple narrative that successfully framed a tediously (for most people) complex topic. the lack of such a narrative condemnates the mob to flail around in a word fog that finally exhausts us straight into the snares of the loudest and slickest operators. Percy Shelly was right. pu$ybref August 24, 2011 at 5:47 am Yves you seem to contradict yourself with certain memes. More regulation is not the way, regulation has not worked, more regulation will not work if you make the bank a public utility. All that will do is centralize more power when we need to be dispersing that power. You say Volcker talks about the back stopping needing to vanish. MISH says the same thing, no more FDIC, eliminate it, that will get market participants to start paying attention to the information flow around them and acting properly on it. But you seem to be wanting to do the opposite. If people don’t have FDIC backing, and we WIPE AWAY that moral hazard, they will do a lot more investigation of the loans banks are making with thier deposits at the local level. The way you seem to be advocating, seems to be going in the wrong direction, we need less centralization, more market participants working on data and info flow at the local level, not more backstopping and centralizing of things that makes market participants fall into moral hazard. Paul has said to totally eliminate the Fed. SO eliminate the FED, eliminate the FDIC, eliminate the treasury market, I bet a lot of folks here would suddenly take a lot bigger interest in where and how they invest and deposit thier money, increasing the market participants who will be breaking down information and making the world better and more efficient for us all. Yearning To Learn August 24, 2011 at 6:21 am More regulation is not the way, regulation has not worked, more regulation will not work if you make the bank a public utility. All that will do is centralize more power when we need to be dispersing that power. Depends on how you do it. If you make it so that there are 3-4 regulated “utility-ONLY” banks PER STATE and also one State Bank (just like the Bank of North Dakota) then we get 200-250 banks. None would be anywhere as big as BofA, Citi, Wells, etc. That would decentralize power. it could also be done by regulating in sensible ways, such as returning to a Glass Steagel type of system, with COMPLETELY separate utility deposit style banking and investment banking systems If bigger banks are needed for international transactions, etc, we could have 3-4 biggger Utility Banks again… and put a cap on their size. (for instance make them no bigger than maybe Fifth Third or if I’m being generous US bank.) also can be done by looking at executive pay. No need to pay high amounts to high flyers in the boring deposits/typical lending space. Cap it all at 5-8x the median wage including all perks. This will encourage smart and driven people to go ELSEWHERE because we don’t need or want their innovation in the routine banking space. They can go blow themselves up in the IB world… but of course they’ll never be able to get as big as they do now without their precious Federally insured deposit base. I do have to wonder if you are being honest with us with some of your questions. it was clearly the UNREGULATED shadow banking system that blew up far far more than Fannie and Freddie… although you do have some good bank-lobby talking points. “Fannie/Freddie caused the blowup”. “we need less regulation”. hmmm… pu$ybref August 24, 2011 at 6:46 am I am being serious, http://www.ideasinactiontv.com/tcs_daily/2005/08/we-need-250-states.html Lets Take Yves Meme further, I think we can all agree regulatory capture is a big issue, from the 50 state AG mess with Mers Fraud, to the banking lobby capture mess, we have a real failure of our political system. As Yves says in this interview, even another financial nuclear bomb going off and imploding the whole finance sector may not be enough to fix what is wrong. In the article above Arnold Kling talked about this years ago, we have WAY TOO MUCH centralized power in DC, we need 250 states, read the article and tell me what you think about his ideas about dispersing the power and breaking down our current tower of babel….. pu$ybref August 24, 2011 at 7:27 am This will encourage smart and driven people to go ELSEWHERE because we don’t need or want their innovation in the routine banking space. – Warren Mosler has said for decades now that the financial sector is more trouble that it is worth, we just need good ole banking like in the old days to serve the public purpose. At the macro level, the wealth and profit that can be gained by our smartest BORG is driving them all to pursue finance careers, instead of finding cancing cures, space elevators, bio nano life extension, personal nuclear submarines and moller flying cars, etc etc Keynes even warned about this a long time ago, brad delong told me it was the most ANTI SOCIAL DEVIL of our capital markets, the “liquidity fetish” as keynes called it. Keynes said people would start trading and investing and allocating resources (and people) on abstractions 5 or 6 levels out, exactly what has happened with some of our derivatives market. As Mosler said, this is such a WASTE of human capital and real resources to get humanity to the stargate atlantis society I hope we are all striving to achieve. Woodrow Wilson August 24, 2011 at 7:51 am A little OT, but since I read some of the comments, it looks like Tom isn’t too simpatico with Eric: http://www.bloomberg.com/news/2011-08-23/new-york-is-removed-from-state-foreclosure-group-after-voicing-concerns.html Teejay August 24, 2011 at 8:09 am Yes! Yes! Hell yes! F. Beard August 24, 2011 at 8:30 am Regulation does nothing to address the fact that banks are fundamentally dishonest. Our banks are essentially a government backed counterfeiting cartel for the benefit of the banks and the so-called “credit worthy” at the expense of everyone else. Are banks even necessary? Why? The US Government can create, spend and tax its own fiat at will. It has no need for banks. As for the private sector, let it finance itself with honest borrowing at honest interest rates OR spend its common stock as money to “share” wealth at the same time it consolidates it for economies of scale. Why do we think we have a free market economy when the most important part of it, the money system, is a government backed and enforced private money monopoly? IF we hope to compete with China now that it has adopted our pseudo-capitalism but with a younger, larger and more enthusiastic population we need to move on to genuine capitalism. Susan the other August 24, 2011 at 11:19 am The Chinese banks aren’t banks. They are depositories and distribution networks. financial matters August 24, 2011 at 9:08 am Great idea about making Bank of America a test case for a public utility (with new management hopefully) rather than have it absorbed by JPM (omg). financial matters August 24, 2011 at 9:15 am Obama chief of staff William Daley, fresh from the Executive Committee of JPMorgan Chase & Co Garth of Izar August 24, 2011 at 9:48 am Can law firms be public utilities too? “No one is above the law and everyone is equal before the law ” and all that rot? tz August 24, 2011 at 9:58 am If they waddle, quack, and swim like public utilities, they should be regulated like them. Of course Enron tried going the other way and caused blackouts in CA when there was plenty of capacity. By their TBTF (“systemically important”), they should be regulated. However your neighborhood credit union or local bank (assuming they don’t turn into Vernon S&L) should be only minimally regulated. Jack Parsons August 25, 2011 at 4:08 am During the power blow-up, Los Angeles had its own public district with fixed price contracts like the old days. They had no problems. jake chase August 24, 2011 at 11:00 am Bank regulation can’t work when banks get BIG. Break them up into 20,000 pieces, pull the plug on derivative bets, hire 150,000 bank examiners to scour their loan files in random audits, close any bank with problems and jail the insiders who break the rules. Remove investment banks from Fed protection and let them blow themselves up. US banking worked fine until Wriston and Rockefeller conspired with the Arabs to monopolize petrodollar lending to third world countries which could never repay and left American taxpayers holding the bag. Securitization did the same thing with mortgages. Monopoly always produces the same result. The idea that elected bagmen should operate our banking system is preposterous. For intelligent people to embrace it show how desperate things have become. ep3 August 24, 2011 at 11:02 am Yves, what got me about the auto bailouts was the following. They were made to have these restrictions on employee wages. And here they were suffering from inefficiencies and declining market share. The auto companies were rated low in quality. They needed the ability to spend on employee wages to hire those good “apple engineers and managers” to dig themselves out of trouble. The whole time Obama is preaching that the banks couldn’t handle having such restrictions because they couldn’t hire the best talent. Yet it was okay to punish the blue collar employer for taking bailout money. That really angers me. Cindy Elmwood August 24, 2011 at 11:49 am Agreed, although I would say that the auto bailouts were done about right (roughly)… management (GM CEO Rick Wagner was canned), the bondholders, and the employees/unions all took a hit and shared the pain. But with the bank bailouts, nobody took a hit, that was the real crime. Susan the other August 24, 2011 at 11:25 am If we have a national bank, a utility, we gotta get a law passed, not a regulation: Only a public utility bank which serves the public under strict regulations can resort to the tax base to be helped out in some unforeseen time of crisis. All the other banks will be stripped of this advantage. citizendave August 24, 2011 at 11:50 am An interview with the president of the Bank of North Dakota, published in Mother Jones in March, 2009, may provide some insight into BoND’s role in the economy of North Dakota. For example, “…we are the depository for all state tax collections and fees…” One of the bank’s functions is to make loans for economic development within the state. They provide student loans (currently at a fixed APR of 6.02%). And they act as a mini-Fed for other banks: “…we service 104 banks and provide liquidity to them and clear their checks and also we buy loans from them when they have a need to overline, whether it’s beyond their legal lending limit or they just want to share risk, we’ll do that. We’re a secondary market for residential loans, so we have a portfolio of $500 to $600 million of residential loans that we buy…” http://motherjones.com/mojo/2009/03/how-nation%E2%80%99s-only-state-owned-bank-became-envy-wall-street My feeling is that I can’t trust any current institution with my money, especially my retirement fund, which is currently parked in a money market fund. I know it’s not safe there either, and it’s earning .01% (but I learned to tolerate not keeping up with inflation, as my wages were flat since 2000). I believe that a bunch of prudent citizens could work together to form a public, mutual bank, that would function within narrow regulations, for the benefit of the people of the state. At this point I am far more willing to trust a public bank than any private bank of which I am aware. Paul Jurczak August 24, 2011 at 11:57 am Convert Bank of America to public utility! The name can stay. steelhead23 August 24, 2011 at 1:51 pm Profit-seeking is the problem. As clearly exposed in Econned, personal profit-seeking led proprietary desk brokers to accept risks to their institutions in order to maximize individual compensation. Similarly, individual institutions took risks that placed the entire financial system at risk in their quests for ever-larger profits. If profit-seeking is the problem, why not encourage most banking to be organized as not-for-profit institutions with significant limits on compensation, particularly profit-based incentives? I believe there is a single, simple approach that should be taken: offer FDIC depositor insurance only to institutions organized as not-for-profit institutions. This would push most commercial banking into not-for-profit institutions. It would also reduce “gaming the regulations” as there would be no profit in it, and it would diminish the tendency for regulatory capture. Banking would become boring, which I perceive as good. Of course, this would not eliminate the need for regulation, but it sure would make regulation easier. Institutions like GS etc. could continue to work their “magic” for such things as mergers and acquisitions and securitization, with modest regulation. And by golly, governments have to allow those whose risks have turned into losses to fail. The very concept of “too big to fail” is a moral hazard. I am aware that such a simple change would be huge and difficult to achieve given the enormous investment in for-profit institutions. So what? I am quite tired of the “let’s regulate” solutions being proffered, as the institutions themselves have captured not just the regulators, but the political system itself (see Dodd-Frank). Also, the concept of regulating them like a public utility, while a huge change when viewed through the eyes of the informed, is quite ho-hum when viewed by an uninformed public that has been brainwashed to believe that government, and by extension, regulation, is the problem. How exactly can one explain risk-shifting behavior to the public? Also, and this is perhaps the larger issue, it wasn’t just the bailouts that allows the banks to avoid the pain of their risk-taking, it is the unwillingness to prosecute crimes that ensures they will continue to be committed. The lack of prosecutions is not merely a moral hazard, but a moral capitulation, the result of which is financial genocide. And we are the proles. RSDallas August 24, 2011 at 2:04 pm This is preposterous. The entire industry would turn into huge gargantuan freddie and fannies. The industry needs government to get the heck out of the way so they can fail when they make bad decisions. There is no regulation more powerful than the threat of bankruptcy. Yves, I am concerned with your desire to become the all in one controller of an industry. Have you been having lunch with Obama? This sounds like the ultimate central planning experiment. Wage control??? Come on! The answer is simply allow them to go broke, separate consumer banking from investment banking and force the regulating arm of the US government to simply do their jobs. When they think there is a public interest involved. Yves, you are a smart person. Our great Nation is currently broken because of those who deem various matters “of public interest”. steelhead23 August 24, 2011 at 2:26 pm Might I remind you that Fannie and Freddie were privatized under Nixon and served shareholder interests as well as public interests. And enlightened Person once said that no man can serve two masters (Matt. 6-24). While I agree that regulation would not solve the problem of risk-shifting, I cannot agree that large federally-insured institutions should be deregulated and allowed to sink or swim as their fortunes warrant. We would go broke. Or, are you perhaps suggesting a bold free-market approach of banking without insurance, in which case bank-runs and financial instability would be the norm. No thanks. Nathanael August 24, 2011 at 7:29 pm Ayup. And Freddie and Fannie worked fine before the Nixon-era privatization. Privatization is the extreme case of regulatory capture. flow5 August 24, 2011 at 2:22 pm This is all very simple. The axiom is that if private profit institutions are to be allowed the “sovereign right” to create money, they must be severely regulated in the management of both their assets & their liabilities. See John Mason: “To me it is evident that things have changed in the financial industry. Over sixty percent of the commercial banking industry in terms of assets are in the hands of twenty five banks, and most of the activities of these banks are NOWHERE NEAR WHAT THE ACTIVITIES OF COMMERCIAL BANKS WERE FIFTY YEARS AGO. And, most of this difference can be related to the advances in information technology” I.e., the money creating activities of the commercial banking system must necessarily be severely RESTRICTED (private or public). Crazy Horse August 24, 2011 at 2:53 pm Hi Yves, What follows is a footnote to your excellent interview: I usually don’t bother proposing “solutions” within the context of the system of privilege, greed and corruption that passes for economic democracy in our dying imperial nation. Until the sh– storm that is on the horizon does its work and the banksters and warlords are toppled from their thrones any reformist ideas are mere intellectual gymnastics. Usually the best I can muster is an attempt at gallows humor from the point of view of one of the exterminated nations. However sometimes I can’t resist a what-if thought experiment. 1-Since the majority of residences in the USA are not owned by the people living in them and paying (or not paying) the mortgages, but rather by banksters and their corporate shell games: 2- And since the banks and hedge funds that hold fraudulent liens on those mortgages (those they haven’t been able to offload onto Fannie & Freddie) are functionally insolvent: 3- And since an abandoned and foreclosed home is soon stripped of anything that can be sold or bartered away and becomes useless as a residence: 4- And since under the present system of ownership as many as half the population would be evicted from their homes and left with no choice but to join the mobs on the street in the event of a real economic collapse: It’s time to start over again with the way we put a roof over our heads. As Dimitri Orlov points out in his book, “Reinventing Collapse” the key difference between the relatively painless way that citizens of the Soviet Union (and Cuba as well) were able to survive the economic collapse of their societies vs. the US is due to the fact that they DID NOT OWN their own homes. Paradoxically, because the state owned the homes and apartment blocks (however basic they might be) when the state collapsed the residents simply stayed in their homes with little increase in homelessness. Where private property is sacrosanct, capitalists believe in the power of the bulldozer rather than a right to shelter and food to stave off starvation. In the US we have a long tradition of Homesteading, used as a way to perform ethnic cleansing with my people as the cleansed. When we were driven off the land it opened up opportunities for the newly landed farmer class which eventually grew to become the American middle class. It’s time to revive and modernize the progressive aspects of that system. Homesteading could solve the property/housing/debt slavery problem that is one of the trigger points of our national collapse. First we’d have to make a few um-“changes”. 1- Exterminate/bankrupt/nationalize/break up all the too-big-to-fail private banks. Simply requiring them to use mark-to-market accounting would take care of most of them. 2- Establish a publicly owned State Central Bank in each state. A study of the North Dakota experience would be a good starting point. 3- Prohibit any former senior officer of JP Morgan/Goldman/BOA etc. from coming closer than 100 yards to a Peoples’ Bank and require them to wear orange jump suits whenever they appear in public. 4- Transfer ownership of all mortgaged property in each state to the state bank. Administer state employee salaries and savings accounts through the state bank, giving it a substantial initial depositor base. Limit privately owned community banks to a single local branch, and prohibit all other private banking. 5- Grant every homeowner who owns a modest home free and clear and has lived in it for at least 10 years a lifetime exclusion from property taxes on their home. 6- Rewrite mortgages on all property to reflect a not-for-profit loan rate, only covering expenses from the state bank and the local lender. 7- Require that residential mortgages be initiated and serviced through local community banks, with funding originating from the State Bank. 7- Offer all previously bank owned and foreclosed properties for homesteading on a first come basis. One per family, retaining the old tradition of requiring the homesteader to prove up on the property by improving it, along with penalties for letting it deteriorate. 8- Institute a highly progressive property tax system based upon size. One dollar per year for 1,000 sq. ft., $100,000 per year for 10,000 sq. ft., and $10,000,000 per year for those trying to emulate The Donald seems about right. flow5 August 24, 2011 at 3:19 pm The CB system has become a “black market” where anything the banker’s want their legislators to pass – goes. Regulation Q was a conspiracy. The non-banks do not compete with the CBs. They are the customers of the CBs. The DIDMCA created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions. The intermediary financial institutions effected were the nation’s savings and loan associations, mutual savings banks, and credit unions. Trust companies and stock savings banks were commercial banks for many years. Written July 1980: “In due course, under this Act, our means-of-payment money supply (now designated as M1A by the Board of Governors) will approximate M-3” The housing boom-bust was no happenstance. Lyle August 24, 2011 at 3:24 pm Actually we had close to utility banking in the 1940s 1950s and 1960s. Interest rates were set by the government (3 percent on time deposits, 6% on loans) being a banker meant being on the golf course by 3 pm. Very dull stuff. And then lots of investment banks, so that no one could cause the system to seize up. Of course that system was so boring we had to replace it because the best and brightest did not go into banking. (Also banks were local only). The first break in this was BankAmericacard I recall my dad being amazed in 1967 when it bought a camera with a card in Ca and we lived in Mi. Ransome August 24, 2011 at 3:41 pm McVickers wrote Hints on Banking, A letter to a Gentleman in Albany… in 1827. He discusses what was wrong with the previous banking models that failed, discusses what banking should be, and discusses how the banking system should operate, essentially a glorified ATM that controls access to credit but lends to pay salaries and expenses. Banks are not profit centers, do not have conflicts between customers and investor-shareholders who bring nothing to the table. Banks do not create money, they manage community credit. They are utilities. Banking is a service. Banking should follow the franchise model that narrows their scope. There is no reason for investors or shareholders or extensive regulation. You follow the rules or you are closed down. Pay is by salary and there is an element of competition for service. The North Dakota model would work as it is a refinement that services a region, the State. Keynes suggested sandbox for speculators with a high price of admittance. Ming August 24, 2011 at 7:08 pm A comment on your presentation during the interview… This was your best interview yet. On the BNN interview concerning government deficits, you appeared rushed, you spoke very quickly, and your tone was tense or nervous. But this interview, your disposition was very good. You seemed calm, competent and confident, you spoke in a comfortable measured tone. You elucidation of ideas was clear, and you did not use any ‘catch phrases’, which is very good. Your use of humour concerning Bank of America’s possible need for public help and the opportunity to turn it into a useful bank was well placed. A very good interview. I realize this format of face to face interview is more comfortable, then interacting via a camera (as per the BNN interview), especially since you can look at the interviewer instead of look at the camera, (which gives an excessively intense feel for the audience), but a calm tone and your sense of humour is definitely applicable to either scenario. Roger Houghton August 24, 2011 at 8:41 pm Banks should have something of value on the line otherwise they’ll never stop taking chances. The only benefit I can see of nationalizing banks would be the saving on the costs of note issue and the costs of commissions on sale of government debt. Those savings would be diminished by the costs of the new regulatory body that assumed those functions and would place a finite limit on those costs i.e. no empire building. I should prefer and I welcome a discussion on transferring banking function to the major real wealth producers. They would use the value tied-up in their plant and machinery, stock of raw materials and product to underwrite their issue of paper. This would mobilize capital that presently accumulates interest uselessly in financial products and provide a solid basis to the currency. Such an initiative would cause many thousands of producers to become local note issuers and return banking to the community and the ‘small is beautiful’ scenario that O F Schumacher outlined so attractively in 1970s before value was removed. It would oblige those countries that have created skyscrapers of debt to influence the rest of the world, to draw-in their horns and attend more closely to the hopes and fears of their own people. We all know there is an intimate connection between foreign policy and the happiness of the people. It would return hopefulness to local communities and resurrect the ‘can do’ spirit of former times. On the down side, with the money supply linked directly to the real economy, the volume of economic activity would fall. We would effectively be repudiating the unstable model based on war for a stable but smaller model based on peace. F. Beard August 24, 2011 at 8:56 pm I should prefer and I welcome a discussion on transferring banking function to the major real wealth producers. They would use the value tied-up in their plant and machinery, stock of raw materials and product to underwrite their issue of paper. This would mobilize capital that presently accumulates interest uselessly in financial products and provide a solid basis to the currency. Such an initiative would cause many thousands of producers to become local note issuers and return banking to the community … Roger Houghton Bingo! Except there should be no “transfer” of banking functions; the government backed and enforced monopoly on private money creation should simply be abolished. Then the free market could come up with any number of money solutions. mansoor h. khan August 25, 2011 at 1:46 am F. Beard, Your (non-privileged) private money creation solution is very likely to result in pre-FED era banking instability (i.e., no deposit insurance) and no central bank (lender of last resort). In your solution: Will the government offer “government fiat” deposit accounts? If so, then these accounts will over time become extremely desirable because they will have an “implicit deposit insurance” because the value of government money will be protected by the power to tax. And slowly (and maybe not so slowly) the “government bank” will become “the bank” (at least this is what I predict). And the government will be able to do a ton of deficit spending because its currency will be so desirable. Mansoor Khan mannfm11 August 25, 2011 at 4:14 am Lender of what? mansoor h. khan August 25, 2011 at 4:32 am How does a (non-privileged) private money creating bank put money into circulation? Does it lend it into circulation? How does it generate demand for its money? Mansoor F. Beard August 25, 2011 at 7:36 am How does a (non-privileged) private money creating bank put money into circulation? mansoor h. khan Does it lend it into circulation? How does it generate demand for its money? mansoor h. khan Common stock as money eliminates the need for conventional money and banks: 1) Common stock as money requires no borrowing or lending. Assets and labor would simply be bought with new stock issue. Thus no PMs, usury, or fractional reserves are required. This is a huge benefit since PMs, usury (see Deuteronomy 23:19-20) and fractional reserves are all problematic. 2) All price inflation is born by the owners of the corporation since every receiver of the new common stock money is by definition a part owner of the corporation. This is an important moral consideration. 3) Without fractional reserves or even lending, then deflation is not a serious threat. 4) Since all money holders are part owners of the corporation then they could vote on how much new money is issued and for what purposes. Thus price inflation is under the control of only those affected by it. 5) The assets of a corporation are typically performing assets though PMs could easily be accommodated too. 6) Common stock as money shares wealth at the same times as it consolidates it for purposes of economies of scale. Labor problems should be non-existent since the workers would be paid in common stock and thus be part owners. The number of those with a stake in capitalism would increase. The need and desire for socialism should decrease. F. Beard August 25, 2011 at 7:49 am Your (non-privileged) private money creation solution is very likely to result in pre-FED era banking instability (i.e., no deposit insurance) and no central bank (lender of last resort). mansoor h. khan You assume that conventional banks are necessary; they aren’t. See my comment below wrt common stock. In your solution: Will the government offer “government fiat” deposit accounts? mansoor h. khan The government could offer a risk-free money storage solution that paid no interest. [snip] And the government will be able to do a ton of deficit spending because its currency will be so desirable. mansoor h. khan If government overspent wrt taxation then its money would lose value. mansoor h. khan August 25, 2011 at 9:20 am F. Beard, “Common stock as money” Has this been done in any significant way in world history anywhere? Mansoor F. Beard August 25, 2011 at 11:32 am Has this been done in any significant way in world history anywhere? Mansoor Apparently, corporations use common stock among themselves as money during acquisitions. As for more general use, fractional reserve lending predates the common stock company which was only invented in 1602. Corporations currently have no incentive to use their common stock as money since they can borrow at artificially suppressed interest rates from the banking cartel. Abolish the cartel and it follows that common stock issuance would be more common. Diane August 24, 2011 at 9:51 pm Yes, banks should be public utilities. mannfm11 August 25, 2011 at 4:13 am Yves, I believe banks are public utilities. Like the other governmental bureaucratic positions, they now pay better than the grunt jobs in the private sector. Government and banking have become partners in crime or haven’t you noticed? Jack Parsons August 25, 2011 at 4:14 am Another aspect of regulated utilities is that they issue AA/AAA bonds. The classic “widows&orphans” bond is hard to find when banks have fun. A large stock of high-grade utility bonds would dent some of the market for high-grade bonds. At present we have a huge political force in favor of deficits because that is the only volume in AAA long-term bonds. Comments are closed. Tip Jar Please Donate or Subscribe!