The Cure For Banking Ills

The current $13B fine assessed on JP Morgan Chase for bad behavior, that the feds just might accept, shows that they haven’t backed off. Not only did they not accept the bank’s earlier piddling offers, they also refused to absolve them from criminal prosecution. It’s about time, and time we straightened out a few things about banking in the US.

It’s not really difficult, and this stuff has been pointed out before. All it would take would be a bit of that Congressional ingredient that’s in chronically short supply. Basically we need to fix the things that Congress has screwed up and zap the new ways Wall Street has designed to extract our money. Breaking up the big banks won’t do the job, because they would immediately begin making themselves gigantic again. Here is what we should do.

Breaking up the big banks won’t do the job.

Nationalize the banking functions of the federal government. Most people think there is such a thing as a United States Bank. There is not. The government farms out the banking functions of the government, most importantly, issuing debt. Our best interests are not served by delegating these functions to profit-seeking entities.

Separate the functions of investment from banking. This is the biggie. The Glass-Steagall Act of 1933 was designed to do exactly that, and prevent abuses that are bound to arise when banking and investing are allowed in the same institution. But the Congress in 1999 apparently believed that humankind had undergone a miraculous evolutionary transformation, so this separation was no longer necessary. Naturally, bankers soon proved them wrong by bringing the world economy crashing down around our ears. Wall Street took our bailout tax money and recovered by 2009, giving themselves million-dollar bonuses. But five years later the rest of us have not recovered. Banking should be banking; investment should be investment.

It follows from the above that the government has no business bailing out investment banks which have made bad decisions with other people’s money, and should be legally prevented from doing so. It’s not “investment risk” if investors can rely on our tax money to remove the risk. With new laws disallowing such bailouts we wouldn’t be wasting our money cleaning up after criminal investment bankers.

Nationalize the banking functions
of the federal government.

Disallow computer trading. The purpose of trading stocks and bonds is to promote the interests of commerce, and thus the citizenry. These interests do not involve the split-second extraction of pennies from the cracks between buying and selling. Computer transactions can occur hundreds of times each second, which makes no sense in the real world. Computer trading has no real function other than to make computer traders rich. This is not what the market is for. It would be simple to bring some common sense back into trading by simply requiring a brief delay between agreeing on a trade and the completion of that trade. Ten minutes? Maybe an hour.

Disallow derivatives. Derivatives are combinations of various types of investment vehicles that are designed by computer. They are so exotic that few Wall Streeters are even able to tell what is in them. Like computer trading, derivatives do not serve the purpose of the market or the interests of the people. They promote only the interests of rich people who own the apps that design them. Besides bankers’ rampant dishonesty, derived evil bundles of fraudulent mortgages were the primary cause of the market crash of 2008. Derivatives and all other vehicles and practices that do not promote the legitimate interests of commerce should simply be disallowed.

The biggie:
separate investment from banking.

Every state should have its own state bank, and their formation should be encouraged by federal policy. Currently, only North Dakota has a state bank, although a number of other states are considering it. These would not be banks that serve the public. They would serve only the state government. They would be the repository of all state tax monies and state fees. State banks would generate their own credit. These functions would insulate the state from market malfunctions like those in 2008, because they would be prevented from any sort of speculation or excess leverage. Money in, money out. Student loans are a significant part of the ND bank functions, and should be part of every state bank plan. State banks would generally support development of the commercial interests of the state. In California that would certainly include agriculture and computer technology, as well as others.

None of this is rocket science. The essence of the necessary corrections is to remove all functions and manipulations of the finance world that do not serve the public interest, make banking boring again by separating all investment functions, and protect state funds with state banks. These steps would stabilize the economy, and there’s no reason for anyone to oppose any of it. Except of course the billionaire bankers who don’t want the party they enjoy with our tax money to end. But frankly, I don’t want them playing with my money any more.


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2 CommentsLeave a comment

  1. Or, if nationalization is not politically feasible, make the banks regulated public utilities.


  2. Excellent idea.


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