Money, credit, & an inconvenient question

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Submitted by b psycho on Mon, 2009-08-10 18:21.
What with all the talk about a "public option" in a possible health care reform bill, I found this Huffington Post column by Ellen Brown proposing a "public option" in banking interesting, both for good and bad reasons.  The points she ticks off about the current system are familiar: the bailouts, huge bonuses in the face of obvious failure, lack of transparency & the willingness of the US government to drastically overpay for assets that mark-to-market rules actually define as worthless.  These facts lead her to the following:
 
We may not be able to stop them, but we can join them. We the people need to play the bankers' game ourselves. Even corporate giants such as General Motors and WalMart have now gotten into the banking game and are easing their credit problems by forming their own banks.
 
Considering the huge amount of power Big Finance has, particularly due to the structure of central banking, it's refreshing to hear this kind of questioning from a liberal perspective.  After all, the US financial system is pretty much one humongous textbook example of regulatory capture. 
 
Now the hard part: what's her definition of "public"?
In President Obama's July 17 weekly address, he repeated his call for a public option in health care, in order to "increase competition and keep insurance companies honest" and to "put an end to the worst practices of the insurance industry." The same call needs to be made for a public option in banking. In some countries, publicly-owned banks have operated alongside privately-owned banks for decades; and in those countries, the current crisis has served to show that public banks generally do a better job of serving the people and protecting their interests than their private counterparts.
So "public"=government.  What a shock...
 
From there, examples are given such as the Canadian province of Alberta & their Treasury Branches during the Great Depression, India, and (I kid you not) China.  There's an example in the US though, since North Dakota runs a state-owned bank.  Sounds successful, though I can't help but wonder if there are other factors protecting them from the credit-burst fallout. 
 
She sums up like so, again touching on some sticking points of the currently accepted system:
 
A bank charter brings with it the privilege of creating "credit" simply as an accounting entry on the bank's books. The flaw in the private banking scheme is that banks create the principal portion of their loans but not the interest, which is continually drawn off the top as profit. New borrowers must continually be found to take out new loans to create this extra profit, making private banking effectively a pyramid scheme; and like any pyramid scheme, it has mathematical limits. Today, those limits appear to have been reached. Personal and national debts have gotten so large relative to incomes that it is no longer possible to maintain the fiction of solvency. We soon won't have the money even to pay the interest on our existing debts, let alone to incur new ones. Public banking does not suffer from that flaw, because interest is not drawn out of the system but is returned to the public coffers. Public banking is thus mathematically sound and sustainable.
 
Clearly something has to give.  However, it seems like the root of the modern US financial system got left in the dust somewhere on the way to this point.  With the Federal Reserve, FDIC, etc., argument that in a way we already have a government system (albeit a corporatist one, rather than the ideal of representation and fulfillment of public good) is quite reasonable.  So the question isn't about whether public banking would be better, but whether or not "public" should, or ever does in practice, equal government.

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The prospects for alt-finance institutions...

#7327 On Mon, 2009 08 10 18:27 b psycho said,

As in "what are they, in your opinion?". If not wholly anti-state in character, is there any model to be thought of or considered that'd serve as a reasonable midpoint?

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Why not separate consumer banks from business banks?

#7329 On Tue, 2009 08 11 02:24 Captin Sarcastic said,

Just a thought, but what if we simply put all the sharks in one tank, and build a separate public bankng infrastructure solely for consumers.

Imagine some of the benefits a non-for profit consumer bank could bring to individuals. Policies that increased one's credit line and lowered their rates if they become unemployed for a period of time. Policies gave the same interest rates to everyone not based on their ability to pay, but on the value of the underlying collateral. Credit lines for off the charts medical expenses to spread them out over a long enough period with a low enough interest rate that people could avoid bankruptcies. Creditanks card fees could be eliminated, along with 300% rate increases. The smallest of small business loans could be allowed from the consumer banks, but once a business has established, they would have to swim with the sharks. The entire industry that is based on negotiating payment with one's lenders could go away as it would be brough in house. If the goal of the institution is to create wealth among it's lenders (Amercan citizen's) and not lose money, it might be very effective. The even wrap the whole grant business into the consumer bank. An individual would apply for a grant, and it would be reviewed and the grant would either be allowed, or the bank could provide an option of a loan.

The bulk of their business would be home loans, historically a very safe bet, and we could leave the wild deals to the business banks. I'd bet that without holding the bulk of America's home loans, none of the business banks could become "too big to fail", and the public bank would be incapable of failure to the extent that it's obligations would be directly protected by the full faith and credit of the US government.

Profits, perhaps limited to 5%, could be used to retire the national debt.

Existing consumer banks need not be shut down by edict, or nationalized, they would simply have to compete. If the so called free market did the job better, good for them, but as noted, this industry could write the book on regulatory capture, and I don't think they have a clue of how to compete in a free market, which explains why they have spent billions on legislation and policy to insure they don't have to compete in a free market.

This is a bit off the wall, nothing I have ever considered before, and generally against my principles, but damnit, my principles seem to do nothing but empower these monters.

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S&L's fit your description

#7340 On Thu, 2009 08 13 04:34 ka1igu1a said,

a New Deal quasi private-public institution whose loan portfolio was mostly home mortgages. But they had to be bailed out in the 80s due to the deleterious effects inflation had their "public business model," namely in terms of the maturity mismatch yield spreads. You had long term mortgage paper yielding in the low single digits(the asset side) and short term paper fetching upwards to 20%(the liability side). It more or less destroyed them. it's exactly why that FNMA, which had been a bit player up until that time in the mortgage market, became so prominent in the 90s, tying into the idea of "secondary markets" to offset the risk. That worked for awhile until easy credit and the housing bust burst that quasi private-public model as well.

it's folly to think that a "public" banking option could work independently of the Federal reserve credit System. frankly, most libertarians should be able to see through this hoax, this canard that failures in political capitalism necessitate some "public option" to put competitive pressures on the politics of capitalism. Wake me up when the "public" in the "public option" becomes divorced from politics; these "collective" institutions suffer from calculation and knowledge problems
that can't be solved or addressed through politics; "market institutions" suffer from the same problems, but they can adjust in real-time, unlike political institutions, which at best, adjust in lagging time, and then can wildly overshoot to overcompensate for earlier calculation errors.

Reference the S & L's again; they were deregulated in the mid-80s--to compensate for the new Deal over-regulation that prevented them from diversifying their asset sheet--just in time for their "new investments" in commodities and "commodity futures" to tank like a dog when the fed's change in monetary policy(contrasting from the 60s and 70s) finally began to take hold in the mid 80s that dramatically brought down cpi inflation. Great timing...

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credit unions?

#7337 On Wed, 2009 08 12 19:00 adam ricketson said,

I know that credit unions have largely been brought into the Federal banking system, but do you think they offer a meaningful alternative? Why aren't they more successful? Do they have trouble mobilizing capital?

I don't have an opinion myself -- I just think they need to be addressed in any discussion of a "people's bank"

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re: credit unions

#7339 On Wed, 2009 08 12 20:51 b psycho said,

The customer-as-shareholder is a nice basic principle IMO, though I haven't dealt with a credit union myself in awhile (haven't had the money lately). Also, despite the capital issue I don't recall much trouble with insolvency on their part lately compared to banks.

That said, I'm not firm on how far current credit unions have wandered off the reservation when it comes to distance between client and administration.

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faulty description of the banking system

#7338 On Wed, 2009 08 12 19:10 adam ricketson said,

Today, those limits appear to have been reached. Personal and national debts have gotten so large relative to incomes that it is no longer possible to maintain the fiction of solvency. We soon won't have the money even to pay the interest on our existing debts, let alone to incur new ones. Public banking does not suffer from that flaw, because interest is not drawn out of the system but is returned to the public coffers. Public banking is thus mathematically sound and sustainable.

If I'm reading this right, I'm fairly certain that it is a false description of our banking system. I've heard a similar theory with regards to the Federal Reserve system (that there is insufficient money to pay off the debt), and I looked into it and discovered that it is simply false.

I'm not sure what she means by "we won't have the money" to repay our debt. Some debtors will have the money, and some won't. This situation is handled by bankruptcy laws. Creditors sometimes loose money due to credit risk. It's no big deal.

It sounds like she's saying that our money would effectively disappear if everyone were to try to pay off their loans. I agree that there would be substantial deflation due to the inflationary effects of fractional reserve banking, but first there is no reason to think that everyone would repay their loans at once and even if they did, there would still be some money in circulation because every debt in the banking system (even accumulated interest) is matched with a credit. After all, the debtor owes that interest to somebody.

Once the debtor pays off the debt, the creditor will have the choice of hoarding his money, investing it, or spending it -- it doesn't disappear (it is not "drawn out of the system"), and there are good reasons not to hoard it.

If our debts are large relative to income, it is solely because the debtors have been spending their borrowed money rather than investing it...not because of any intrinsic property of the banking system.

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