Since reading What Then Must We Do? (see previous post), I’ve been thinking about banks and how they might be re-structured to be of greater service and less risk to our economies.
During the Great Depression, Congress passed the Glass-Steagall Act which separated commercial banks from securities firms. This meant that banks could not gamble on the stock market or with derivatives using the money of their depositors. Depositors’ funds were used instead to provide credit for mortgages and local businesses which the bank thought were good credit risks. A share of the profits went to the depositors, the bank took a cut as the middle-man, and the borrowers also benefited hopefully through a successful business or eventual property ownership.
The banks, then, were not on a pedestal of moral high ground, but by and large they were seen as providing a valuable service to the communities in which they operated.
Gradually this quietly changed, and in 1999 the Glass-Steagall Act, which to a large extent banks had already circumvented, was officially repealed, and investment banking firms were free to gamble openly with the depositors’ money held in commercial banks. With the help of computers and traders with mathematical gifts, banks began to make hundreds of millions of dollars. Big banks became places where huge fortunes could be made, not places that were essentially there to service the diverse needs of the community, or even of the country.
Unfortunately, the risks still lay principally with the depositors, not with the banks themselves, and when the crash came in 2008, most top-level bankers were not bankrupted. Many even continued to receive mind-boggling bonuses on the grounds that they were the only ones who understood the entire system well enough to keep the entire global economy from catastrophic collapse.
And that in many ways, as I understand it, is where we still are. Big banks are still too big to fail. In fact, some of the biggest banks are now even bigger than they were in 2008, and are effectively still insured by the government who could not let them fail.
What then can be done?
Gar Alperovitz in What Then Must We Do? gives many examples of banks still functioning today principally for the benefit of its depositors and borrowers. There are many more than I had realized – thousands of credit unions, cooperative banks, and small and medium-sized public banks providing millions of dollars to finance small businesses, renewable energy, housing, and infrastructure. He thinks we can not only survive, but actually thrive, with banks like these.
Alperovitz doesn’t say what he thinks specifically should be done about mega-banks like Citicorp, Goldman Sachs, JKPMorgan Chase, Bank of America, and Wells Fargo. But I think the implication is that they should be cut loose altogether from government support and that its investors should be made solely responsible for gains and losses they incur.
This sounds simple, but I can’t see that it is. If their size is not regulated, their very existence is going to have vast economic repercussions, for better or worse.
But can their size be controlled? Do mega-banks already have so much clout, so much money, so much political influence, that they cannot be cut down to size?
I don’t know. But if it is possible, it seems to me it’s going to come from a ground swell of public demands as we realize two things. The first is that we as individuals and as communities are not dependent on the big banks, that our credit unions and cooperatives and local banks are meeting our banking needs without the same level of risk related to the operations of the voracious mega-banks. And secondly, we need to see that mega-banks themselves are too risky. It is like living next to a volcano which we cannot predict with any precision, but which is certainly going to erupt again and again, pouring its destructive lava on all of us living in its path.