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From Bail-Outs to Bail-Ins: Our Banking System Needs Help

Public banking is a hot topic of late, both here on Shareable and in the world at large. There are reports concluding that public banks are the antidote to Wall Street, the silver bullet for Main Street, and the key to truly democratizing the economy. It has further been suggested that municipal governments should lean hard into public banks in order to bolster local economies by keeping money circulating within the community rather than trucking it off to the big banks. 

Now comes a new book by Ellen Brown, The Public Bank Solution, in which the author makes a number of critical arguments for shifting our financial paradigm. She begins by laying out the foundation for her case: 

The western banking system today has all the earmarks of a giant Ponzi scheme on the verge of collapse: a global credit crisis extorting massive bailouts from the taxpayers; a derivatives casino with a U.S. notional (or nominal) exposure of $300 trillion; governments refusing further bank bailouts; “bail-in” policies in which the largest banks are being instructed to confiscate their depositors’ funds if necessary, in a last-ditch effort to keep their doors open. “Systemically risky” hardly describes the condition of the giant derivative banks, which are like a house of cards waiting for a strong wind. Fortunately, there is a safer, more sustainable way to design a banking system.


Peacefully resisting corporate greed is the new American way. Photo credit: freestylee / Foter / CC BY-NC-SA. Used under Creative Commons license.

Even though few of us fully understood what was happening, we were all affected by the crisis that came from the derivatives-fueled recession. The flashy, failed gimics of the banking industry got us all riled up, but they also diverted our attention away from a more basic problem upon Brown hopes to shine a bit more light: the fact that our entire, global financial system is rooted in — and powered by — a neverending cycle of debt. And, yet, we continue to perpetuate the myth that economic growth is not only necessary, but also sustainable. It simply is not. 

... the fundamental flaw in the banking scheme is something much simpler and more comprehensible: the unsustainable nature of a monetary system in which most money is created as a debt to private banks. Paying a perpetually compounding rent to the banking sector may work mathematically, but it is not sustainable in the real world. workers, resources and customers all reach their natural limits; but interest continues to grow, in an imaginary world of numbers divorced from the realities of the producing economy.

Consider these arresting facts:

  • Roughly one-third of everything we buy goes to interest.
  • The interest goes to private banks which create money as a debt — a debt for which more is always owed back than was advanced in the original loan.
  • At the height of the financial bubble, over 40 percent of U.S. corporate profits went to the financial industry — up from 7 percent in 1980.
  • Between $21 trillion and $32 trillion are now hidden in offshore tax havens — between one-third and one-half of the global GDP — and a majority of these dollars emanate from Wall Street.


The global credit and debt system is, indeed, a trap. Photo credit: bitzcelt / Foter / CC BY-NC-ND. Used under Creative Commons license.

Of course, all of that only comes into play in a private banking system. Public banks (as well as many credit unions and community banks) often operate as non-profits in order to shift their mission away from wealth accumulation and toward community development. 

Two banking models have competed for dominance for thousands of years — public and private. In the public model, interest and profits belong to the community, and they are returned to the community. Credit is delivered to the economy in an organic way that sustains it and is sustainable.

Publicly owned banks operate in the public interest by law. That means they must support the real, wealth-producing economy. Bank profits generated from the credit of the public are returned to the public.

Another point Brown underlines and hightlights in bold are the "bail-in" policies that are cropping up around the globe. Since the U.S. issued a taxpayer-funded $700 billion bailout to big banks in order to stanch the economic bloodletting in late 2008, many governments have become hesitant to follow suit.

The global control center of the private international banking system in Switzerland has, therefore, come up with a new scheme for saving the too-big-to-fail banks. Creditors — including depositors, the largest class of unsecured creditors — are to be “bailed in.” In the event of insolvency, the megabanks are being instructed to recapitalize themselves by converting their liabilities (debts) into bank stock, effectively confiscating depositor funds.

... Today the derivatives casino is the biggest game on Wall Street, posing enormous risks to depositors and the economy. The putative safety net for this high wire act is the FDIC (Federal Deposit Insurance Corporation), which is theoretically backed by the government. But new Dodd-Frank regulations forbid further taxpayer bailouts to save banks from the more speculative types of derivatives losses; and whether the FDIC fund will be adequate to the task without its own taxpayer bailout is questioned by the agency itself.

Translation: If a bank starts to falter due to its own investment risks, it can convert deposits and holdings into bank stock to shore itself up... YOUR deposits and holdings, to be clear. Although most countries have set minimum thresholds and percentages to define who takes the brunt of the hit, the precendent being set is undeniably pliable.


Benjamin Franklin had it right back in the early18th Century. Photo credit: Beverly & Pack / Foter / CC BY-NC-ND. Used under Creative Commons license.

Public banks really could be a — if not the — solution to the world's financial pickle. Benjamin Franklin thought so way back in the Pennsylvania colony 300 years ago when the local land bank "issued low-interest loans to farmers. The interest returned to the government, funding the provincial budget. Except for import duties on liquor, the government collected no taxes at all. It also had no debt and paid no interest. There was abundant money for trade and the economy thrived."

Sounds like a more sustainable American dream, doesn't it?

What do you think? Leave a comment below.

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