The Other I

July 2, 2013

What can we do about the banks?

Filed under: The Economy: a Neophyte's View — theotheri @ 4:00 pm

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changed, and in 1999 the Glass-Steagall Act, which to a large extent banks had already circumvented, was officially repealed, and investment banking firms were free to gamble openly with the depositors’ money held in commercial banks.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.





  1. As individuals we must stop giving banks the oxygen on which they thrive – CREDIT. As a bank customer I want an economical rate of interest on my deposits ie either equal to or greater than the Bank Rate.


    Comment by lairdglencairn — July 3, 2013 @ 10:59 am | Reply

    • The problem, as I understand it, is that at this point it is not we bank customers who are providing the big banks with credit – it is our central banks. The banks don’t need the money of their depositors, which is why they are offering us such paltry rates of interest.

      It would be simple if the central banks could just stop subsidizing the banks, but then the banks will reduce their lending even further to small businesses and for mortgages, and the unemployment and bankruptcy rates will sky-rocket. Big companies can go to the stock market to raise cash to expand their businesses, but the small guys need the credit the banks have traditionally provided.

      It’s an incredibly complex system and it’s not even limited to capitalist systems. Socialist countries, even China where the government controls the banks, are in the same pickle.

      The more I read, the more complex the problem looks. I used to think quantum physics required a genius to understand, but I think physics pales next to economic systems. And the environment, now that we’re talking about problems that are bigger than our human brains can handle.

      Any insights from your point of view are more than welcome!


      Comment by Terry Sissons — July 3, 2013 @ 2:09 pm | Reply

  2. Good stuff. My understanding is that if the Fed stopped pumping money into the big banks, interest rates would go up, including bond rates (municipals, e.g.) because they are pegged to the Fed rate, which is virtually zero. That would make bonds attractive to investors again and divert some of that easy cash that is being made off the stock market largely with our tax dollars but of course not for us. Have I got this right?

    Meanwhile, cities, states and other non-commercial entities would get the benefit of increased revenue through bond sales, which might just mean we got some bridge and tunnel work done and maybe a rail line that isn’t sixty years behind the rest of the first world. Ya think?


    Comment by pianomusicman — July 3, 2013 @ 10:08 pm | Reply

    • Well, as I understand it, it’s more complex than raising interest rates and using the funds for our badly-needed infrastructure.

      First, if big companies start to retrench, the unemployment rate will rise further, tax revenues will drop, benefit costs will rise, and the economy will falter. If the bond market doesn’t think the economy is going to recover, interest rates on government debt will rise – as they are now in countries like Portugal, Italy, Greece, Spain, and which the UK is determined should not happen here.

      Besides raising the cost of servicing our federal debt, when interest rates rise, the value of the municipal bonds drops, and can only be sold at a discount because it would be crazy to pay face value for a bond paying 3%, say, when one can spend the same amount of money and get 4 or 5%. So I’m not sure rising interest rates would lead to more money for local governments.

      At least the US, like the UK, can print as much money as they want, which is what quantitative easing is about. But in the end, it has an inflationary potential that as history shows us and as the Germans still know to their cost can sometimes run wild.

      I find the whole question of how economies work utterly fascinating. But unfortunately, I’m much clearer about the problems than I am about the solutions.


      Comment by Terry Sissons — July 4, 2013 @ 4:25 pm | Reply

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