The People’s Bank

From Whence We Came:

As much as some people cling to the idea that the United States has always been a land of anti-government, laissez-faire bustling capitalists, the fact is that the specters of democratic statism haunt the chronicles of American history, all the way from the beginning. One of the oldest and most powerful phantoms is the Bank of the United States that died and was reborn, again and again through the history of American politics like the immortal monsters of slasher horror films.

Because the Bank was there from the beginning – Hamilton drafted it, Washington signed it, and Adams maintained it. Even when the anti-central government Democrats took possession of the Presidency in 1800, Jefferson maintained the Bank and Madison actively promoted it (due to the support of Albert Gallatin (the Secretary of the Treasury and a Democratic-Republican who had begun to learn the virtues of Federal activism in such matters as the Bank and Federally-funded public works). The Second Bank of the United States was established in an era of Democratic-Republican dominance, suggesting that the Bank of the United States had a rough political consensus between 1800-1832. Now, two caveats should be made – first, that the original bank was a public/private venture, and second, that the Bank was highly politically controversial, leading to thirty years of Jacksonian decentralized state banks – but the larger point remains that the Federal government of the Revolutionary Generation was not some libertarian paradise of limited government that left the economy to laissez faire.

The second half of the 19th century saw an enormous explosion of central banking. The Civil War gave us the Second Banking System, whereby the Republican Party, strong nationalists that they were, created for the first time a single, national, paper currency, a system of national banks with reserve requirements (held in Treasury securities), regulated by the Comptroller of the Currency.  When this system began to fail (largely due to the requirement to back all notes with Treasuries and the lack of a lender of last resort, as well as the restrictive monetary policy of the era), the Federal Reserve was called into being. However, what few people realize is that the public-private nature of the Fed was the result of a political bargain struck between conservative Republicans like Nelson Aldrich (who wanted a 100% private Fed), Progressives (who wanted a 100% public Fed), and conservative Democrats (who wanted a decentralized and private Fed).

This was not a single grand vision, but a messy compromise, and there remains in the history books, the vision of a Fed that might (and should) have been, a People’s Bank exercising political authority over the economy.

Where We Stand Today:

This brings us to our current dilemma. In the last twenty years, the so-called FIRE sector (finance, insurance, and real estate) of our economy has metastasized out of control – helped along by deregulation, regulatory capture, and refusal to establish new regulations to keep up with a changing industry. The vast increase in essentially paper value of derivatives, collateralized debt obligations (CDOs), mortgage-backed securities (MBSs), asset-backed securities (ABS), credit-default swaps, and other financial instruments have dramatically raised the stakes of a potential financial collapse, while making some Wall Street firms and their chief executives wealthy on a scale that puts the Gilded Age to shame. Rockefeller and Morgan were rich as they came, but they at least had the good sense to not order gold-flaked ice cream for dessert.

All of this would be merely troubling if the financial industry was merely off in its own little world making up imaginary money, if it wasn’t for the fact that the financial industry has begun to infect the rest of the economy with a dangerous instability. As Matt Taibbi’s piece on Goldman Sachs shows us, the financialization of the economy has had a predictable effect – with too much money chasing too few vehicles for investment, the financial sector begins to create speculative bubbles in new and untried areas of the economy. In the late 90s, they turned to the internet and tech stocks as their new bubble, because investors who might be wary of new and untried firms in something they understood, like steel or cars, promising massive and infinite returns didn’t know what this magical thing called the Internet might do – maybe their stocks really were worth their weight in solid gold. Then it was the housing bubble, where the massive profusion of new investment vehicles (MBSs, default swaps, etc.) and the deliberate compromising of ratings agencies were used to hide the on-the-ground reality (that money was being flung at mortgages on the expectation that home values would never fall, so it didn’t matter that people couldn’t afford their mortgages) behind the illusion that you could slice up debts into risk-free chunks, hedge yourself with insurance so that you couldn’t lose money, and that prices were only ever going to go up.  Even more recently, it’s been commodities futures, where speculators have been bidding up the price of oil and other basic commodities, leveraging the huge sums they now control to pump up prices in a fashion that Jay Gould would have approved of.

All this has huge consequences in the real economy – if you over-invest in internet and tech companies, you get the boom and bust in Silicon Valley, which made some people rich, left a lot of computer programmers and engineers high-and-dry, and somehow we’re still behind the rest of the advanced world when it comes to broadband. When you turn the housing industry from a way for people to buy homes into a gigantic casino/piggybank, then people can’t afford to live where they work, sprawl accelerates, net savings turn into massive net debt, and when it all goes belly up, we have huge foreclosure rates, ghost towns, millions of people’s homes “underwater,” homelessness, nosediving public revenues, and Depression-level unemployment in areas dependent on the real estate industry. When oil contracts are traded twenty times between production and sale, oil prices go up to $145 a barrel and $4-5 per gallon at the pump, the price of everything else (because we generally burn oil to transport goods) goes up, consumers’ purchasing power goes down, and the economy sours. You know things have gotten bad when we’re actually considering limiting speculation in oil.

And every time we try to fix the mess they made, the financial industry sticks a gun to its head and threatens to pull the trigger unless we give them trillions in public funds. So they make money when the bubble goes up, they make money when it goes down, and they make money when someone else is stuck with the cleanup. Meyer Lansky would be proud.

How Do We Get Out of Here?

Someone like Matt Taibbi can feel comfortable telling people there’s nothing we can do. It’s the journalist’s prerogative, well-honed since the days of H.L Mencken, to stand back and cynically chuckle as the world burns. But as an activist, I don’t feel that I can leave it at that. I think there are things that we can do, or at least try to do. A lot of ink and pixels have been spent talking about the need for new regulation, and I don’t really have much to add there for the moment.

But one idea that I do want to explore is to return to where we should have gone with American central banking – the idea of a public finance sector, a People’s Bank. In my imagination, the People’s Bank would focus on three key areas where we need an active, not-for-profit public presence:

1. Secure Deposits, Open to All– despite the success of the FDIC in making people’s savings and checking accounts more secure than they used to be, the large numbers of bank failures in the recent crisis suggests that we have a need for something even safer than an FDIC-insured bank – a Federal bank where you can put your money without ever having to be afraid of losing it. However, I wouldn’t be a very good progressive if I didn’t extend this idea one further to explore a whole area of the “shadow financial sector” which really hurts people who don’t make enough money to be worried about losing it.
   1. Free Checking/Savings Accounts –  Twenty-eight million Americans don’t have either a checking or a savings account . Usually, this is because they don’t have enough money on hand to make it over the minimum required to open an account, or because they live so close to the line that they can’t wait three days for their paychecks to cover it, or because they’ve become overdrawn and hit with so many bank fees that they owe more than they can put in. Thus, the working poor are forced to turn to check-cashing companies who charge up to 391% interest for their services.  Simply by giving working people a way to put their money in a safe place, we would be increasing the net income of twenty-eight million working poor people by hundreds if not thousands of dollars a year.
2. Availability of Basic Transactional Credit – in addition to being exploited when it comes to simply getting access to their own paychecks, many Americans, including the working poor but also comprising vast swathes of the working class, are also routinely victimized by their lack of access to basic transactional credit. Instead, they turn to  payday lenders, who charge up to 911% interest, and auto-title lenders who charge up to 300% interest. These companies, together with the check-cashers discussed above, collectively rake in $8.5 billion a year in fees. And if the financial crisis’ underbelly – the racial profiling of subprime loans revealed in the Wells Fargo lawsuit in Baltimore,  the abuse of so-called NINJA loans by middle-men, the ridiculous spectacle of the banks defeating cramdown legislation and watering down credit card interest rate reform – has shown us anything, it’s that the so-called legitimate finance industry isn’t so much better in how it deals with working and middle class Americans. Thus, the second basic function for the People’s Bank – one that I have to give credit to Matt Yglesias for linking to – is Steve Waldman’s suggestion that the government should provide “basic transactional credit as a public good…Every adult would be offered a Treasury Express card, which would have, say, a $1000 limit. Balances would be payable in full monthly. The only penalty for nonpayment would be denial of access of further credit, both by the government and by private creditors…Unpaid balances would be forgiven automatically after a period of five years. No interest would ever be charged.”
3. Non-Profit Yardstick Home Lending –  in the wake of Fannie Mae/Freddie Mac, it would seem counter-intuitive to argue for a public institution to guarantee home loans. However, I would argue that the failure of those two institutions is more an argument against privatization – for decades, the two institutions worked well at what they were supposed to do, namely guarantee long-term loans; it was when they tried to chase the subprime money (which they came late to) that they went belly-up. So if we’re going to have an institution designed to make it easier and safer to buy mortgages, and as we just spent huge amounts of money rescuing these two institutions, let’s actually do the job right. In the wake of the failure to cramdown mortgages or otherwise deal with the foreclosure crisis, let’s have an institution that values homes correctly (one of the other market failures of the housing collapse was the corruption of home value assessors), that lends wisely, that provides long-term fixed rate mortgages to people who need primary residences…perhaps even using the returns on middle-class loans to make loans affordable to working people without creating crooked sub-prime practices.
4. A Truly Public Fed – finally, and this would be the largest, most politically fraught, and most unlikely reform, we need to fold the Federal Reserve’s central banking powers into the People’s Bank. An institutional accommodation from 1912 left us with a central banking partly public and partly private, and we all know what happens to a house divided. I believe in central banking, and of the various political groups out there, I have the most contempt for the gold-standard loving Fed-abolishers. But the essence of central banking – controlling interest rates, managing the supply of money, acting as a lender of last resort, and regulating financial institutions – is an exercise in public authority over the economy. I would argue that much of the current lack of faith in the government’s attempt to reboot the financial system stems, among other things, from the hidden nature of the Fed’s operations, how the Federal Reserve as an institution has the singular authority to loan trillions of public funds without any democratic control, accountability, and virtually no oversight. (on a side note, I would also argue that the public-private nature of the Fed is why it for so long has focused on inflation over unemployment, as well as its habitual paranoia over wage growth) So if we’re going to have a central bank, as we should, let’s forgo the inane illusion of laissez-faire, and actually have a people’s bank.